THE  PEINCIPLES  OF  ECONOMICS 


THE   PRINCIPLES   OF 
ECONOMICS 

WITH   APPLICATIONS    TO 
PRACTICAL    PROBLEMS 


BY 


FRANK  A.  FETTER,  PH.D. 

PROFESSOR   OF   POLITICAL   ECONOMY  AND    FINANCE, 
CORNELL   UNIVERSITY 


NEW  YORK 

THE  CENTURY  CO. 

1904 


Copyright,  1904,  by 
THE  CENTUKY  Co. 


THE  DEVINNE  PRESS 


TO  THE  STUDENTS 

OF    THREE    UNIVERSITIES 

—INDIANA,  STANFORD,  AND   CORNELL— 

FOR   WHOM,  WITH  WIIOM,  AND   BY  WHOSE  AID 

THIS   BOOK    CAME    TO    BE   WRITTEN 


,    .  •    ,   ' 


CONTENTS 

PART   I 

PAGE 

THE  VALUE  OF  MATERIAL  THINGS    .  1-169 


DIVISION  A— WANTS  AND  PRESENT   GOODS 

CHAPTER 

1  THE  NATURE  AND  PURPOSE  OF  POLITICAL  ECONOMY  :   NAME 

AND  DEFINITION;  PLACE  OF  ECONOMICS  AMONG  THE 
SOCIAL  SCIENCES;  THE  RELATION  OF  ECONOMICS  TO 
PRACTICAL  AFFAIRS 3 

2  ECONOMIC  MOTIVES:    MATERIAL  WANTS,  THE  PRIMARY 

ECONOMIC  MOTIVES  ;  DESIRES  FOR  NON-MATERIAL  ENDS, 
AS  SECONDARY  ECONOMIC  MOTIVES 9 

3  WEALTH  AND  WELFARE:    THE  RELATION  OF  MEN  AND 

MATERIAL  THINGS  TO  ECONOMIC  WELFARE;  SOME  IM- 
PORTANT ECONOMIC  CONCEPTS  CONNECTED  WITH  WEALTH 
AND  WELFARE  .  .  .  . 15 

4  THE  NATURE  OF  DEMAND:    THE  COMPARISON  OF  GOODS 

IN  MANTS  THOUGHT  ;  BEM AND  FOR  GOODS  GROWS  OUT 
-    OF  SUBJECTIVE  COMPARISONS 21 

5  EXCHANGE  IN  A  MARKET  :  EXCHANGE  OF  GOODS  RESULTING 

FROM  DEMAND  ;   BARTER  UNDER  SIMPLE  CONDITIONS  ; 
'  PRICED  IN  A  ]\f  ARKW* 30 

6  PSYCHIC  INCOME  :    INCOME  AS  A  FLOW  OF  GOODS  ;    INCOME 

AS  A  SERIES  OF  GRATIFICATIONS  39 


DIVISION  B— WEALTH  AND  RENT 

7  WEALTH  AND  ITS  DIRECT  USES  :  THE  GRADES  OF  RELATION 
OF  INDIRECT  GOODS  TO  GRATIFICATION  ;  CONDITIONS  OF 
ECONOMIC  WEALTH  ...  46 


viii  CONTENTS 

CHAPTER  PAGE 

jpTHE  RENTING  CONTRACT:    NATURE  AND  DEFINITION  OF    ^ 
RENT  ;    THE  HISTORY  OF  CONTRACT  RENT  AND  CHANGES 
IN  IT ,    .    52 

9  THE  LAW  OF  DIMINISHING  RETURNS  :  DEFINITION  OF  THE 
CONCEPT  OF  (ECONOMIC)  DIMINISHING  RETURNS;  OTHER 
MEANINGS  OF  THE  PHRASE  "DIMINISHING  RETURNS"; 
DEVELOPMENT  OF  THE  CONCEPT  OF  DIMINISHING  RETURNS  61 

THEORY  OF  RENT:  THE  MARKET  VALUE  OF  THE 
USUFRUCT  :  DIFFERENTIAL  ADVANTAGES  IN  CONSUMPTION 
GOODS  ;  DIFFERENTIAL  ADVANTAGES  IN  INDIRECT  GOODS  73 

11  REPAIR,  DEPRECIATION,  AND  DESTRUCTION  OF  WEALTH: 

RELATION  TO  ITS  SALE  AND  RENT  :  REPAIR  OF  RENT- 
BEARING  AGENTS;  DEPRECIATION  IN  RENT-EARNING 
POWER  OF  AGENTS  KEPT  IN  REPAIR;  DESTRUCTION  OF 
NATURAL  STORES  OF  MATERIALS 81 

12  INCREASE  OF  RENT-BEARERS  AND  OF  RENTS  :    EFFORTS  OF 

MEN  TO  INCREASE  PRODUCTS  AND  RENT-BEARERS; 
EFFECTS  OF  SOCIAL  CHANGES  IN  RAISING  THE  RENTS 
OF  INDIRECT  AGENTS  90 


DIVISION  C— CAPITALIZATION  AND  TIME-VALUE 

13  MONEY  AS  A  TOOL  IN  EXCHANGE  :  ORIGIN  OF  THE  USE  OF 

MONEY;  NATURE  OF  THE  USE  OF  MONEY;  THE  VALUE  OF 
TYPICAL  MONEY 98 

14  THE  MONEY  ECONOMY  AND  THE  CONCEPT  OF  CAPITAL  :  THE 

BARTER  ECONOMY  AND  ITS  DECLINE  ;  THE  CONCEPT  OF 
CAPITAL  IN  MODERN  BUSINESS 108 

15  THE  CAPITALIZATION  OF  ALL  FORMS  OF  RENT  :  THE  PUR- 

CHASE OF  RENT-CHARGES  AS  AN  EXAMPLE  OF  CAPITALI- 
ZATION ;  CAPITALIZATION  INVOLVED  IN  THE  EVALUATING 
OF  INDIRECT  AGENTS;  THE  INCREASING  ROLE  OF  CAPI- 
TALIZATION IN  MODERN  INDUSTRY 118 

16  INTEREST  ON  MONEY  LOANS:  VARIOUS  FORMS  OF  CON- 

TRACT INTEREST  ;    THE  MOTIVE  FOR  PAYING  INTEREST  .  131 

17  THE  THEORY  OF  TIME-VALUE:    DEFINITION  AND    SCOPE 

OF  TIME-VALUE  ;  THE  ADJUSTMENT  OF  THE  RATE  OF  TIME- 
DISCOUNT  141 


CONTENTS  ix 

CHAPTER  PAGE 

18  RELATIVELY  FIXED  AND  RELATIVELY  INCREASABLE  FORMS 

OF  CAPITAL:  How  VARIOUS  FORMS  OP  CAPITAL  MAY 
BE  INCREASED  j  SOCIAL  SIGNIFICANCE  OF  THESE  DIFFER- 
ENCES   152 

19  SAVING  AND  PRODUCTION  AS  AFFECTED  BY  THE  RATE  OF 

INTEREST  :  SAVING  AS  AFFECTED  BY  THE  INTEREST  RATE  ; 
CONDITIONS  FAVORABLE  TO  SAVING  ;  INFLUENCE  OF  THE 
INTEREST  RATE  ON  METHODS  OF  PRODUCTION  ....  159 


PART  II 
THE  VALUE  OF  HUMAN  SERVICES 171-355 

DIVISION  A— LABOR  AND  WAGES 

20  LABOR  AND  CLASSES  OF  LABORERS  :   RELATION  OF  LABOR 

TO  WEALTH  j  VARIETIES  OF  TALENTS  AND  OF  ABILITIES 
IN  MEN 173 

21  THE  SUPPLY  OF  LABOR  :  WHAT  Is  A  DOCTRINE  OF  POPULA- 

TION ?    POPULATION  IN  HUMAN  SOCIETY  ;  CURRENT  AS- 
PECT OF  THE  POPULATION  PROBLEM 184 

22  CONDITIONS  FOR  EFFICIENT  LABOR:  OBJECTIVE  PHYSICAL 

CONDITIONS  ;  SOCIAL  CONDITIONS  FAVORING  EFFICIENCY  j 
DIVISION  OF  LABOR 195 

23  THE  LAW  OF  WAGES  :  NATURE  OF  WAGES  AND  THE  WAGES 

PROBLEM  j  THE  DIFFERENT  MODES  OF  EARNING  WAGES  ; 
WAGES  AS  EXEMPLIFYING  THE  GENERAL  LAW  OF  VALUE    205 

/* — *rx_ 

24  THE  RELATION  OF  LABOR  TO  VALUE  :  RELATION  OF  RENT 

TO  WAGES***ifcgTX?rT6N  OF  TiME-VALUE   TO   WAGES  J   THE 


RELATION  OF  LABOTI  TO  VALUE 215 

25  THE  WAGE  SYSTEM  AND  ITS  RESULTS  :  SYSTEMS  OF  LABOR  ; 

THE  WAGE  SYSTEM  AS  IT  Is ;  PROGRESS  OF  THE  MASSES 
UNDER  THE  WAGE  SYSTEM 226 

26  MACHINERY  AND  LABOR  :  EXTENT  OF  THE  USE  OF  MACHIN- 

ERY j  EFFECT  OF  MACHINERY  ON  THE  WELFARE  AND  WAGES 
OF  THE  MASSES  236 


x  CONTENTS 

CHAPTER  PAGE 

27  TRADE-UNIONS:    THE  OBJECTS  OF  TRADE-UNIONS;    THE 

METHODS  OF  TRADE-UNIONS  ;  COMBINATION  AND  WAGES    245 

DIVISION  B— ENTERPRISE  AND  PROFITS 

28  PRODUCTION  AND  THE  COMBINATION  OF  THE  FACTORS  :  THE 

NATURE  OF  PRODUCTION  ;  COMBINATION  OF  THE  FACTORS  257 

29  BUSINESS  ORGANIZATION  AND  THE  ENTERPRISER'S  FUNCTION  : 

THE  DIRECTION.  OF  INDUSTRY  ;  QUALITIES  OF  A  BUSINESS 
ORGANIZER  j  THE  SELECTION  OF  ABILITY 265 

30  COST  OF  PRODUCTION  :  COST  OF  PRODUCTION  FROM  THE  EN- 

TERPRISER'S POINT  OF  VIEW  ;  COST  OF  PRODUCTION  FROM 
THE  ECONOMIST'S  STANDPOINT 273 

31  THE  LAW  OF  PROFITS  :  MEANING  OF  TERMS  ;  THE  TYPICAL 

ENTERPRISER'S  SERVICES  REVIEWED  ;  STATEMENT  OF  THE 
LAW  OF  PROFITS 282 

32  PROFIT-SHARING,  PRODUCERS'  AND  CONSUMERS'  COOPERA- 

TION :  PROFIT-SHARING;  PRODUCERS'  COOPERATION  ;  CON- 
SUMERS' COOPERATION .  292 

(/33) MONOPOLY  PROFITS:   NATURE  OF  MONOPOLY;   KINDS  OF 

MONOPOLY  ;  THE  FIXING  OF  A  MONOPOLY  PRICE     .    .    .  302 

34  GROWTH  OF  TRUSTS  AND  COMBINATIONS  IN  THE  UNITED 

STATES:  GROWTH  OF  LARGE  INDUSTRY  IN  THE  UNITED 
STATES ;  ADVANTAGES  OF  LARGE  PRODUCTION;  CAUSES 
OF  INDUSTRIAL  COMBINATIONS 312 

35  EFFECT  OF  TRUSTS   ON   PRICES:    How   TRUSTS   MIGHT 

AFFECT  PRICES  ;  How  TRUSTS  HAVE  AFFECTED  PRICES    323 

36  GAMBLING,  SPECULATION,  AND  PROMOTERS'  PROFITS  :  GAM- 

BLING vs.  INSURANCE;  THE  SPECULATOR  AS  A  RISK- 
TAKER  ;  PROMOTER'S  AND  TRUSTEE'S  PROFITS  ....  333 

37  CRISES  AND  INDUSTRIAL  DEPRESSIONS:    DEFINITION  AND 

DESCRIPTION  OF  CRISES;  CRISES  IN  THE  NINETEENTH 
CENTURY  ;  VARIOUS  EXPLANATIONS  OF  CRISES  ....  345 


CONTENTS 


PART    III 

PAGE 

THE  SOCIAL  ASPECTS  OF  VALUE     .    .  357-563 


DIVISION  A— RELATION  OF  PRIVATE  INCOME 
TO   SOCIAL  WELFARE 

CHAPTER 

38  PRIVATE  PROPERTY  AND  INHERITANCE:  IMPERSONAL  AND 

PERSONAL  SHARES  OF  INCOME  ;  THE  ORIGIN  OF  PRIVATE 
PROPERTY;  LIMITATIONS  OF  THE  RIGHT  OF  PRIVATE 
PROPERTY  . 359 

39  INCOME  AND  SOCIAL  SERVICE  :    INCOME  FROM  PROPERTY  j 

INCOME  FROM  PERSONAL  SERVICES 370 

40  WASTE  AND  LUXURY  :  WASTE  OF  WEALTH  j  LUXURY  .    .    .  381 

41  REACTION  OF  CONSUMPTION   ON   PRODUCTION:    REACTION 

UPON  MATERIAL  PRODUCTIVE  AGENTS  j   REACTION  UPON 
/      THE  EFFICIENCY  OF  THE  WORKERS;   EFFECTS  ON  THE 
ABIDING  WELFARE  OF  THE  CONSUMER 392 

42  DISTRIBUTION  OF  THE  SOCIAL  INCOME:  THE  NATURE  OF 

PERSONAL  DISTRIBUTION  ;  METHODS  OF  PERSONAL  DIS- 
TRIBUTION . .4Q2 

43  SURVEY  OF  THE  THEORY  OF  VALUE  :  REVIEW  OF  THE  PLAN 

FOLLOWED  ;  RELATION  OF  VALUE  THEORIES  TO  SOCIAL 
REFORMS  ;  INTERRELATION  OF  ECONOMIC  AGENTS  .  .  '  .*  412 


DIVISION  B— RELATION  OF  THE  STATE  TO  INDUSTRY 

44  FREE  COMPETITION  AND  STATE  ACTION  :  COMPETITION  AND 

CUSTOM  j  ECONOMIC  HARMONY  THROUGH  COMPETITION  ; 
SOCIAL  LIMITING  OF  COMPETITION 422 

45  USE,  COINAGE,  AND  VALUE  OF  MONEY:   THE  PRECIOUS 

METALS  AS  MONEY  ;  THE  QUANTITY  THEORY  OF  MONEY     431 

46  TOKEN  COINAGE  AND  GOVERNMENT  PAPER  MONEY  :  LIGHT- 
/      WEIGHT  COINS  j  PAPER  MONEY  EXPERIMENTS  ;  THEORIES 

OF  POLITICAL  MONEY    ,  .  443 


xii  CONTENTS 

CHAPTER  PAGE 

47  THE  STANDARD  OP  DEFERRED  PAYMENTS  :  FUNCTION  OF  THE 

STANDARD;  INTERNATIONAL  BIMETALLISM 5  THE  FREE- 
SILVER  MOVEMENT  IN  AMERICA 453 

48  BANKING  AND  CREDIT:  FUNCTIONS  OF  A  BANK;   TYPICAL 

BANK  MONEY  ;  BANKS  OF  THE  UNITED  STATES  TO-DAY    .  462 

49  TAXATION  IN  ITS  RELATION  TO  VALUE  :  PURPOSES  OF  TAX- 

ATION ;  FORMS  OF  TAXATION  ;  PRINCIPLES  AND  PRACTICE  .  471 

50  THE  GENERAL  THEORY  OF  INTERNATIONAL  TRADE  :  INTER- 

NATIONAL TRADE  AS  A  CASE  OF  EXCHANGE  ;  THEORY  OF 
FOREIGN  EXCHANGES  OF  MONEY;  REAL  BENEFITS  OF 
FOREIGN  TRADE 480 

51  THE  PROTECTIVE  TARIFF:   THE  NATURE  AND  CLAIMS  OF 

PROTECTION  ;  THE  REASONABLE  MEASURE  OF  JUSTIFICA- 
TION OF  PROTECTION;  VALUES  AS  AFFECTED  BY  PRO- 
TECTION   491 

52  OTHER  PROTECTIVE    SOCIAL   AND    LABOR    LEGISLATION: 

SOCIAL  LEGISLATION  ;  LABOR  LEGISLATION 504 

53  PUBLIC  OWNERSHIP  OF  INDUSTRY:    EXAMPLES  OF  PUBLIC 

OWNERSHIP  ;  ECONOMIC  ASPECTS  OF  PUBLIC  OWNERSHIP    514 

54  RAILROADS  AND  INDUSTRY  :  TRANSPORTATION  AS  A  FORM  OF 

PRODUCTION  ;  THE  RAILROAD  AS  A  CARRIER  ;  DISCRIMI- 
NATION IN  RATES  ON  RAILROADS 525 

55  THE  PUBLIC  NATURE  OF  RAILROADS  :  PUBLIC  PRIVILEGES 

OF  RAILROAD  CORPORATIONS  ;  POLITICAL  AND  ECONOMIC 
POWER  OF  RAILROAD  MANAGERS  ;  COMMISSIONS  TO  CON- 
TROL RAILROADS 534 

56  PUBLIC   POLICY  AS  TO  CONTROL  OF  INDUSTRY:     STATE 

REGULATION  OF  CORPORATE  INDUSTRY  ;  DIFFICULTIES  OF 
PUBLIC  CONTROL  OF  INI  USTRY  ;  TREND  OF  POLICY  AS  TO 
PUBLIC  INDUSTRIAL  ACTIVITY 544 

57  FUTURE  TREND  OF  VALUES:  PAST  AND  PRESENT  OF  ECO- 

NOMIC SOCIETY  ;  THE  ECONOMIC  FUTURE  OF  SOCIETY  .    .  555 

QUESTIONS  AND  CRITICAL  NOTES 565 

INDEX 595 


PREFACE 

THIS  book  had  its  beginning  ten  years  ago  in  a  series  of 
brief  discussions  supplementing  a  text  used  in  the  class- 
room. Their  purpose  was  to  amend  certain  theoretical  views 
even  then  generally  questioned  by  economists,  and  to  present 
most  recent  opinions  on  some  other  questions.  These  criti- 
cal comments  evolved  into  a  course  of  lectures  following  an 
original  outline,  and  were  at  length  reduced  to  manuscript 
in  the  form  of  a  stenographic  report  made  from  day  to  day 
in  the  class-room.  The  propositions  printed  in  italics  were 
dictated  to  the  class,  to  give  the  key-note  to  the  main  divi- 
sions of  the  argument.  Repeated  revisions  have  shortened 
the  text,  cut  out  many  digressions  and  illustrations,  and 
remedied  many  of  the  faults  both  of  thought  and  of  ex- 
pression ;  but  no  effort  has  been  made  to  conceal  or  alter  the 
original  and  essential  character  of  the  simple,  informal,  class- 
room talks  by  teacher  to  student.  To  this  origin  are  trace- 
able many  conversational  phrases  and  local  illustrations, 
and  the  occasional  use  of  the  personal  form  of  address. 

The  lectures,  at  the  outset,  sought  to  give  merely  a  sum- 
mary of  widely  accepted  economic  theory,  not  to  offer  any 
contribution  to  the  subject.  While  they  were  in  progress, 
however,  special  studies  in  the  evolution  of  the  economic 
concepts  were  pursued,  and  the  manuscript  of  a  book  on 
that  more  special  subject  was  carried  well  toward  comple- 
tion. That  work,  which  it  is  hoped  some  time  to  complete, 
was,  for  several  reasons,  put  aside  while  the  present  text 
was  preparing  for  publication.  The  economic  theories  of  the 
present  transition  period  show  many  discordant  elements, 

xiii 


xiv  PREFACE 

yet  the  author  felt  that  his  attempt  to  unify  the  statement 
of  principles,  in  an  elementary  text  explaining  modern  prob- 
lems, and  consistent  in  its  various  parts,  helped  to  reveal 
to  him  both  difficulties  and  possible  solutions  in  the  more 
special  theoretical  field.  The  unforeseen  outcome  of  these 
varied  studies  is  an  elementary  text  embodying  a  new  con- 

J  ception  of  the  theory  of  distribution,  an  outline  of  which 
will  be  found  in  Chapter  Forty-three.  It  is,  in  brief,  a  con- 
sistently subjective  analysis  of  the  relations  of  goods  to 
wants,  in  place  of  the  admixture  of  objective  and  subjective 
distinctions  found  in  the  traditional  conceptions  of  rent, 
interest,  and  price. 

The  beginning  of  the  systematic  study  of  economics,  like 
the  first  steps  in  a  language,  is  difficult  because  of  the 
entire  strangeness  of  the  thought,  and  it  is  not  to  be  hoped 
that  any  pedagogic  device  can  do  away  with  the  need  of 
strenuous  thinking  by  the  student.  The  aim,  however,  in 
the  development  of  this  theory  of  distribution,  has  been  to 
proceed  by  gradual  steps,  as  in  a  series  of  geometrical  propo- 

/  sitions,  from  the  simple  and  familiar  acts  and  experiences 
of  the  individual's  every-day  life,  through  the  more  complex 
relations,  to  the  most  complex,  practical,  economic  problems 
f  the  day.  JTIie  hope  has  long  been  entertained  by  economists 
that  a  conception  of  the  whole  problem  of  value  would  be  at- 
tained that  would  coordinate  and  unify  the  various  "laws," 
—those  of  rent,  wages,  interest,  etc.  This  solution  has  here 
been  sought  by  a  development  of  recent  theories,  the  unit 
of  the  complex  problem  of  value  being  the  simplest,  imme- 
dia_tej_temporary  gratification. 

Possibly  some  teachers  will  observe  and  regret  the  almost 
entire  absence  of  critical  discussions  of  controverted  points 
in  theory,  which  make  up  so  large  a  part  of  some  of  the 
older  texts.  The  more  positive  manner  of  presentation  has 
been  purposely  adopted,  and  only  such  reference  is  made 
to  conflicting  views  as  is  needed  to  guard  the  student  against 
misunderstanding  in  his  further  reading.  The  author  would 


THE 
PRINCIPLES  OF  ECONOMICS 

PART  I 
DIVISION  A-WANTS  AND   PRESENT  GOODS 

CHAPTER  1 

THE  NATURE  AND  PURPOSE  OF  POLITICAL 
ECONOMY 

§  I.      NAME   AND   DEFINITION 

1.    Economics,   or   political   economy,   may    be   defined,  verbal 
briefly,  as  the  study  of  men  earning  a  living;  or,  more  fully,  **  fie™tlo: 
as  the  study  of  the  material  world  and  of  the  activities  and  nomics 
mutual  relations  of  men.  so  far  as  all  these  are  the  ob- 
jective conditions  to  gratifying  desires.    To  define,  means  to 
mark  off  the  limits  of  a  subject,  to  tell  what  questions  are 
or  are  not  included  within  it.    The  ideas  of  most  persons  on 
this  subject  are  vague,  yet  it  would  be  very  desirable  if  the 
student  could  approach  this  study  with  an  exact  under- 
standing of  the  nature  of  the  questions  with  which  it  deals. 
Until  a  subject  has  been  studied,  however,  a  definition  in 
mere  words  cannot  greatly  aid  in  marking  it  off  clearly 
in   our  thought.      The   essential   thing   for  the   student   is 
to   see   clearly   the   central    purpose   of   the   study,    not   to 
decide  at  once  all  of  the  puzzling  cases. 

3 


4       NATURE   AND  PURPOSE  OF  POLITICAL  ECONOMY     [CH.  i 


Natural 
sciences 
deal  with 
material 
things 


Economics 
studies 
some  social 
acts  and  re- 
lations 


2.  A  definition  that  suggests  clear  and  familiar  thoughts 
to  the  student  seem$  at  first  much  more  difficult  to  get  in  any 
social  science  than  in  the  natural  sciences.  These  deal  with 
concrete,  material  things  which  we  are  accustomed  to  see, 
handle,  and  measure.  If  a  mere  child  is  told  that  botany  is 
a  study  in  which  he  may  learn  about  flowers,  trees,  and 
plants,  the  answer  is  fairly  satisfying,  for  he  at  once  thinks 
of  many  things  of  that  kind.  When,  in  like  manner  zoology 
is  defined  as  the  study  of  animals,  or  geology  as  the  study  of 
rocks  and  the  earth,  the  words  call  up  memories  of  many  fa- 
miliar objects.  Even  so  difficult  and  foreign-looking  a  word 
as  ichthyology  seems  to  be  made  clear  by  the  statement  that 
it  is  the  name  of  the  study  in  which  one  learns  about  fish.  It 
is  true  that  there  may  be  some  misunderstanding  as  to  the 
way  in  which  these  subjects  are  studied,  for  botany  is  not  in 
the  main  to  teach  how  to  cultivate  plants  in  the  garden,  nor 
ichthyology  how  to  catch  fish  or  to  propagate  them  in  a  pond. 
But  the  main  purpose  of  these  studies  is  clear  at  the  outset 
from  these  simple  definitions.  Indeed,  as  the  study  is  pur- 
sued, and  knowledge  widens  to  take  in  the  manifold  and  va- 
rious forms  of  life,  the  boundaries  of  the  special  sciences 
become  not  more  but  less  sharp  and  definite. 

Political  economy,  on  the  other  hand,  as  one  of  the  social 
sciences,  which  deal  with  men  and  their  relations  in  society, 
seems  to  be  a  very  much  more  complex  thought  to  get  hold 
of.  We  are  tempted  to  say  that  it  deals  with  less  familiar 
things ;  but  the  truth  may  be,  as  a  thoughtful  friend  suggests, 
that  the  simple  social  acts  and  relations  are  more  familiar 
to  our  thought  than  are  lions,  palm-trees,  or  even  horses. 
Every  hour  in  the  streets  or  stores,  one  may  witness  thou- 
sands of  acts,  such  as  bargains,  labor,  payments,  that  are  the 
subject-matter  of  economic  science.  Their  very  familiarity 
may  cause  men  to  overlook  their  deeper  meaning. 

Many  other  definitions  have  been  given  of  political  econ- 
omy. It  has  been  called  the  science  of  wealth,  or  the  science 
of  exchanges.  Evidently  there  are  various  ways  in  which 


$n]  THE  SOCIAL  SCIENCES  5 

wealth  may  be  considered  or  exchanges  made.  The  particu- 
lar aspects  that  are  dealt  with  in  political  economy  will  be 
made  clear  by  considering  two  other  questions,  the  place  of 
economics  among  the  social  sciences  and  the  relation  of 
economics  to  practical  affairs. 


§  II.      PLACE   OF   ECONOMICS   AMONG   THE   SOCIAL   SCIENCES 

1.  Political  economy,  as  one  of  the  social  sciences,  may  Economics 
be  contrasted  with  the  natural  sciences,  which  deal  with  ma-  contrasted 

with  the 

terial  things  and  their  mutual  relations,  while  it  deals  with  natural 
one  aspect  of  men's  life  in  society,  namely,  the  earning  of  a  sciences 
living,  or  the  use  of  wealth.    It  is  true  that  political  economy 
also  has  to  do  with  plants  and  animals  and  the  earth— in 
fact,  with  all  of  those  things  which  are  the  subject-matter  of 
the  natural  sciences;  but  it  has  to  do  with  them  only  in  so 
far  as  they  are  related  to  man's  welfare  and  affect  his  esti- 
mate of  the  value  of  things ;  only  in  so  far  as  they  are  related 
to  the  one  central  subject  of  economic  interest,  the  earning 
of  a  living. 

2.  The  social  sciences  deal  with  men  and  their  relations  character 
with  each  other.     The  word  "social"  comes  from  the  Latin  of  thes°- 
socius,  meaning  a  fellow,  comrade,  companion,  associate.    As  ences 
men  living  together  have  to  do  with  each  other  in  a  great 

many  different  ways,  and  enter  into  a  great  many  different 
relations,  there  arise  a  great  many  different  social  problems. 
Each  of  the  social  sciences  attempts  to  study  man  in  some 
one  important  aspect— that  is,  to  view  these  relations  from 
some  one  standpoint. 

Man's  acts,  his  life,  and  his  motives  are  so  complex  that  it 
is  not  surprising  that  there  has  been  less  definiteness  in  the 
thought  of  the  social  sciences,  and  that  they  have  advanced 
less  rapidly  toward  exactness  in  their  conclusions,  than  have 
the  natural  sciences.  This  complexity  also  explains  the  dis- 
couragement of  the  beginner  in  the  early  lessons  in  this  sub- 
ject. Usually  the  greatest  difficulties  appear  in  the  first  few 


6      NATURE   AND  PURPOSE  OF  POLITICAL  ECONOMY      [CH.  1 


Economics, 
politics, 
law,  and 
ethics 


weeks  of  its  study.  The  thought  is  more  abstract  than  in 
natural  science ;  it  requires  a  different,  I  will  not  say  higher, 
kind  of  ability  than  does  mathematics.  But  little  by  little  the 
strangeness  of  the  language  and  ideas  disappears;  the  bare 
definitions  become  clothed  with  the  facts  of  observation  and 
recalled  experiences;  and  soon  the  "economic"  acts  and  re- 
lations of  men  in  society  come  to  be  as  real  and  as  interesting 
to  the  student  as  are  the  materials  in  the  natural  world  about 
him — often,  indeed,  more  interesting. 

3.  Political  economy  is  related  to  all  the  other  social 
sciences,  it  being  the  study  of  certain  of  men's  relations, 
while  politics,  law,  and  ethics  have  to  do  with  other  relations 
or  with  relations  under  a  different  aspect.  Politics  treats  of 
the  form  and  working  of  government  and  is  mainly  con- 
cerned with  the  question  of  power  or  control  of  the  indi- 
vidual's actions  and  liberty.  Law  treats  of  the  precepts  and 
regulations  in  accordance  with  which  the  actions  of  men  are 
limited  by  the  state,  and  the  contracts  into  which  they  have 
seen  fit  to  enter  are  interpreted.  Ethics  treats  the  question 
of  right  or  wrong,  studies  the  moral  aspects  of  men's  acts 
and  relations.  The  attempt  just  made  to  distinguish  between 
the  fields  occupied  by  the  various  social  sciences  betrays  at 
once  the  fundamental  unity  existing  among  them.  The  acts 
of  men  are  closely  related  in  their  lives,  but  they  may  be 
looked  at  from  different  sides.  >The  central  thought  in  eco- 
nomics is  the  business  relation,  the  relation  of  men  in  ex- 
changing their  services  or  material  wealth.  In  pursuing 
economic  inquiries  we  come  into  contact  with  political,  legal, 
and  ethical  considerations,  all  of  which  must  be  recog- 
nized before  a  final  practical  answer  can  be  given  to  any 
question.  Nevertheless  the  province  of  economics  is  limited. 
It  is  because  of  the  feebleness  of  our  mental  power  that  we 
divide  and  subdivide  these  complex  questions  and  try  to 
answer  certain  parts  before  we  seek  to  answer  the  whole. 
When  we  attempt  this  final  and  more  difficult  task,  we  should 
rise  to  the  standpoint  of  the  social  philosopher. 


Ill]  RELATION   TO  PRACTICAL  AFFAIRS 


§  III.       THE   RELATION    OF   ECONOMICS   TO   PRACTICAL   AFFAIRS 


1.  The  ideal  of  political  economy  here  set  forth  is  that  I  Economics 

(is  first  a 

of  knowledge,  arriving  at  a  statement  of  the  lawj.  to  which 
economic  actions  conform.  It  is  not  the  advocacy  of  any 
particular  policy  or  idea,  but  if  it  arrives  at  any  conclu- 
sions, any  truths,  these  cannot  fail  to  affect  the  practical 
action  of  men. 

Political  economy,  because  defined  as  the  science  of  wealth,  But  it 
has  been  described  by  some  as  a  gospel  of  Mammon.     It  is  ^hes 
hardly  necessary  to  refute  such  a  misconception.     Political  practical 
economy  is  not  the  science  of  wealth-getting  for  the  indi-  interests 
vidual.     Its  study  is  not  primarily  for  the  selfish  ends  and 
interest  of  the  individual.   (^Certainly  some  of  its  lessonsA 
may  be  of  practical  value  to  men  in  active  business}  forl 
many  economic  "principles"  are  but  the  general  statement/ 
of  those  ideas  that  have  been  approved  by  the  experience! 
of  business  men,  of  statesmen,  and  of  the  masses  of  men. 
(Some  of  its  lessons  must  have  educational  value  in  prac-t 
tical  business,  for  political  economy  is  not  dreamed  out  by 
the  closet  philosopher,  but  more  and  more  it  is  the  attempt! 
to  describe  the  interests  and  the  action  of  the  practical] 
world  in  which  men  must  live}    Many  men  are  working 
together  to  develop  its  study— those  who  collect  statistics 
and  facts  bearing  on  all  kinds  of  practical  affairs,  and  those 
who  search  through  the  records  of  the  past  for  illustrations 
of  experiments  and  experiences  that  may  help  us  in  our 
life  to-day. 

2.  But,  in  the  main,  the  study  of  political  economy  is  a  Economic 
social  study  for  social  ends  and  not  a  selfish  study  for  in-  s 
dividual  advantage.     The  name  political  economy  was  first  democracy 
suggested  in  France  when  the  government  was  monarchical 

and  despotic  in  the  extreme.  As  domestic  economy  indicates 
a  set  o'f  rules  or  principles  to  guide  wisely  the  action  of  the 


8      NATURE  AND  PURPOSE  OF  POLITICAL  ECONOMY       [CH.  l 

housekeeper  or  the  owner  of  an  estate,  so  political  economy 
was  first  thought  of  ^as  a  set  of  rules  or  principles  to  guide  the 
king  and  his  counselors  in  the  control  of  the  state.  The  term 
has  continued  to  bear  something  of  that  suggestion  in  it, 
though  of  late  the  term  "economics,"  as  being  broader  and 
less  likely  to  be  confused  with  politics,  has  very  generally 
come  into  use.  But  in  the  degree  in  which  unlimited  mon- 
archy has  given  way  to  the  rule  of  the  people,  the  concep- 
tion of  political  economy  has  been  modified.  In  a  democracy 
there  is  need  for  a  general  diffusion  of  knowledge.  The 
power  now  rests  not  with  the  king  and  a  few  counselors, 
but  in  the  last  resort  with  the  people,  and  therefore  the 
people  must  be  acquainted  with  the  experience  of  the  past, 
must  have  all  possible  systematic  knowledge  to  enlighten 
public  policy  and  to  guide  legislation. 

is  of  grow-  Moreover,  with  the  growth  of  the  modern  state,  with  the 
ing  interest  jncreasing  importance  of  business,  and  of  industrial  and 
influence  commercial  interests,  as  compared  with  changes  of  dynasty  or 
the  personal  rivalries  of  rulers,  economic  questions  have 
grown  in  relative  importance.  In  our  own  country,  par- 
ticularly since  the  subjects  of  slavery  and  of  States'  rights 
ceased  to  absorb  the  attention  of  our  people,  economic  ques- 
tions have  pushed  rapidly  into  the  foreground.  Indeed,  it 
has  of  late  been  more  clearly  seen  that  many  of  the  older 
political  questions,  such  as  the  American  Revolution  and 
slavery,  formerly  discussed  almost  entirely  in  their  political 
and  constitutional  aspects,  were  at  bottom  questions  of  eco- 
nomic rivalry  and  of  economic  welfare.  The  remarkable  in- 
crease in  the  attention  given  to  this  study  in  colleges  and  uni- 
versities in  the  last  twenty  years  is  but  the  index  of  the 
greatly  increased  interest  and  attention  felt  in  it  by  citizens 
generally. 

To  sum  up,  it  may  be  said  that  in  the  study  of  political 
economy  we  are  seeking  the  reason,  connection,  and  relations 
in  the  great  multitude  of  acts  arising  out  of  the  dependence 
of  desires  on  the  world  of  things  and  men. 


CHAPTER  2 
ECONOMIC   MOTIVES 

§  I.      MATERIAL  WANTS,   THE  PRIMARY  ECONOMIC  MOTIVES 

1.  A  logical  explanation  of  industry  must   begin  with  Feeling 
a  discussion  of  the  nature  of  wants,  for  the  purpose  of  in-  ur*esto 

economic 

dustry  is  to  gratify  wants.  An  economic  want  may  be  de-  actions 
fined  as  a  feeling  of  incompleteness,  because  of  the  lack  of  a 
part  of  the  outer  world  or  of  some  change  in  it.  Often  the 
question  asked  when  one  first  sees  a  moving  trolley  car  or 
automobile  or  bicycle  is :  What  makes  it  go  ?  The  first  ques- 
tion to  ask  in  the  part  of  the  study  of  economic  society  here 
undertaken  is:  What  is  its  motive  force?  Without  an 
answer  to  that  question  one  cannot  hope  to  understand  the 
ceaseless  and  varied  activities  of  men  occupied  in  the  mak- 
ing of  a  living.  The  question  merits  long  and  careful  study, 
but  the  general  answer  is  so  simple  that  it  seems  almost 
self-evident:  The  motive  force  in  economics  is  found  in  the 
feelings  of  men.  It  is  men's  desire  to  make  use  of  men  and 
things  about  them  "which  calls  forth  all  the  manifold  phenom- 
ena studied  in  economics. 

2.  Wants  among  animals  depend  on  the  environment;  Animal 
that  is  to  say,  the  utmost  that  creatures  of  a  lower  order  g^pedby 
than  man  can  do  is  to  take  things  as  they  find  them.     The  their  en- 
imagination  and  intelligence  of  animals  are  not  developed  ™ 
enough  to  lead  them  to  desire  much  beyond  that  which  is 
ordinarily  to  be  obtained.     And  so  the  environment  shapes 

and  affects  the  animal.    The  fish  is  fitted  to  live  in  the  water 
and  thrives  there,  and  we  must  believe,  enjoys  living  there. 

9 


10 


ECONOMIC   MOTIVES 


[CH.  2 


The  horse  and  the  cow  like  best  the  food  of  the  fields,  and 
so  each  species  of  animal,  in  order  to  survive  in  the  severe 
struggle  for  existence,  has  been  forced  to  fit  itself  to  the  con- 
ditions in  which  it  lives.  After  the  animal  has  been  thus 
fitted,  its  desire  is  for  those  things  normally  to  be  found 
in  its  surroundings.  So  different  animals  desire  or  want 
different  things,  but  always  it  is  the  environment  that  de- 
termines the  want,  and  not  the  want  that  determines  the 
environment. 

3.  In  simpler  human  societies,  wants  are  mostly  confined 
to  physical  necessities;  that  is,  in  the  earlier  stages  of  society, 
man's  wants  are  very  much  like  those  of  the  animals.    Man 
bends  his  energies  to  securing  the  things  necessary  to  sur- 
vival. He  feels  the  pangs  of  hunger  and  he  strives  to  secure 
food.     He  feels  the  need  of  companionship,  for  it  is  only 
through  association  and  mutual  help  that  men,  so  weak  as 
compared  with  many  kinds  of  animals,  are  able  to  resist  the 
enemies  which  beset  them.    He  needs  clothing  to  protect  him 
against  the  harsher  climates  of  the  lands  to  which  he  moves. 
For  the  same  purpose,  to  protect  himself  against  the  cold  and 
rain,  he  needs  a  shelter,  a  cave,  a  wigwam,  or  a  hut;  for  a 
house  is  but  a  larger  dress. 

4.  In  human  society,  wants  develop  and  transform  the 
orld.    In  the  rudest  societies  of  which  there  is  any  record, 

savages  are  found  with  wants  developed  in  a  great  number 
of  directions  beyond  the  wants  of  any  animals.  Man  is  not 
a  passive  victim  of  circumstances;  his  wants  are  not  deter- 
mined solely  by  his  environment;  his  desires  soar  beyond 
the  things  about  him.  As  men  become  more  the  masters 
of  circumstances,  their  desires  anticipate  mere  physical 
wants ;  they  seek  a  more  varied  food  of  finer  flavor  and  more 
delicately  prepared.  Dress  is  not  limited  by  physical  com- 
fort, for  one  of  the  earliest  of  the  esthetic  wants  to  develop 
is  the  love  of  personal  ornament.  The  rude  hut  or  com- 
munal lodge  to  protect  against  rain  and  cold  becomes  a 
home.  Out  of  the  earlier  rude  companionship  develop  the 


§1]  PRIMARY  ECONOMIC   MQO&VES  11 

noblest  sentiments  of  friendship  and  family  life.  Seeking 
to  gratify  the  senses  and  the  love  of  action,  men  develop 
esthetic  tastes,  the  love  of  the  beautiful  in  sound,  in  form, 
in  taste,  in  color,  in  motion.  And  finally,  as  the  imagination 
and  intellect  develop,  there  grow  up  the  various  forms  of 
intellectual  pleasures— the  love  of  reading,  of  study,  of 
travel,  and  of  thought. 

The  various  wants  of  man  are  sometimes  classified  as  neces- 
sities, comforts,  and  luxuries,  but  all  economists  take  care 
to  emphasize  that  these  terms  have  only  relative  meanings 
which,  in  the  rapidly  changing  conditions  of  modern  life,  are 
changing  constantly.  The  comforts  of  one  generation,  or  of 
one  country,  become  the  necessities  in  another ;  and  luxuries 
becoming  comforts,  are  looked  upon  finally  as  necessities. 
And  as  the  desires  grow,  they  more  and  more  alter  the  world. 
Man  has  changed  the  face  of  the  earth;  he  has  affected  its 
climate,  its  fertility,  its  beauty,  because,  either  for  better  or 
for  worse,  his  desires  have  impressed  themselves  upon  the 
world  about  him. 

5.  In  human  society  the  growth  of  wants  is  necessary  to\  wants 
progress.  From  the  earliest  times  teachers  of  morals  have  ™^tpr 
argued  for  simplicity  of  life  and  against  the  development  wealth 
of  refinements.  We  do  not  now  raise  the  moral  question, 
but  there  is  no  doubt  that  the  economic  effect  of  developing 
wants  is  in  the  main  to  impel  to  greater  effort.  They  are 
the  mainspring  of  economic  progress.  In  recent  discussion 
of  the  control  of  the  tropics,  the  too  great  contentedness  of 
tropical  peoples  has  been  brought  out  prominently.  .Some 
one  has  said  that  if  a  colony  of  New  England  school-teach- 
ers and  Presbyterian  deacons  should  settle  in  the  tropics, 
their  descendants  would,  in  a  single  generation,  be  wearing 
breech-clouts  and  going  to  cock-fights  on  Sunday.  Certain 
it  is  that  the  energy  and  ambition  of  the  temperate  zone  are 
hard  to  maintain  in  warmer  lands.  The  negro 's  content  with 
hard  conditions,  so  often  counted  as  a  virtue,  is  one  of  the 
difficulties  in  the  way  of  solving  the  race  problem  in  our 


12 


ECONOMIC  MOTIVES 


[CH2. 


r 


South  to-day.  Booker  T.  Washington,  and  others  who  are 
laboring  for  the  elevation  of  the  American  negroes,  would  try 
first  to  make  them  discontented  with  the  one-room  cabins,  in 
which  hundreds  of  thousands  of  families  live.  If  only  the  de- 
sire for  a  two-  or  three-room  cabin  can  be  aroused,  experience 
shows  that  family  life  and  industrial  qualities  may  be  im- 
proved in  many  other  ways. 

Not  only  in  America,  but  in  most  civilized  lands  to- 
day, is  seen  a  rapid  growth  of  wants  in  the  working-classes. 
The  incomes  and  the  standard  of  living  have  become  increas- 
ing, but  not  so  fast  as  have  the  desires  of  the  working-classes. 
Regret  has  been  expressed  by  some  that  the  workers  of 
Europe  are  becoming  "declassed."  Increasing  wages,  it  is 
said,  bring  not  welfare,  but  unhappiness,  to  the  complaining 
masses.  If  discontent  with  one's  lot  goes  beyond  a  moderate 
degree,  if  it  is  more  than  the  desire  to  better  one's  lot  by 
personal  efforts,  if  it  becomes  an  unhappy  longing  for  the 
impossible,  then  indeed  it  may  be  a  misfortune.  But  a  mod- 
erate ambition  to  better  one's  condition  is  the  "divine  dis- 
content" absolutely  indispensable  if  energy  and  enterprise 
are  to  be  called  into  being. 

It  is  a  suggestive  fact  that  civilized  man,  equipped  with 
all  of  the  inventions  and  the  advantages  of  science,  spends 
more  hours  of  effort  in  gaining  a  livelihood  than  does  the 
savage  with  his  almost  unaided  hands.  Activity  is  dependent 
not  on  bare  physical  necessity,  but  on  developed  wants — in 
the  economic  sense  of  the  term.1  Such  social  institutions  as 
property  and  inheritance  owe  their  origin  and  their  justifi- 
cation to  their  average  effect  on  the  motives  to  activity.  If 
society  is  to  develop,  if  progress  is  to  continue,  human  wants 
—not  of  the  grosser  sort,  but  ever  more  refined— must  con- 
tinue to  emerge  and  urge  men  to  action. 


§11]  SECONDARY  ECONOMIC   MOTIVES  13 


§  H.      DESIRES  FOR  NON-MATERIAL  ENDS,   AS  SECONDARY 
ECONOMIC  MOTIVES 

1.  The  spiritual  nature  of  man  must  not  be  ignored  in  The  real 
economic  reasoning.  j  There  has  been  much  and  just  criticism  man  in 
of   the    earlier   writers    and    of    their   conclusions    because 

so  little  account  was  taken  by  them  of  any  but  the 
motive  of  self-interest  in  economic  affagsT  (generally  it  was 

assumed  that  men  knew  their  own  interest]  and  sought  in  a  * 

very  unsympathetic  way  those  things  which  would  gratify 
their  material  wants.  Thus  man  in  economic  reasoning  was 
made  an  abstraction,  differing  from  real  men  in  his  lack  of 
manifold  spiritual  and  social  elements. 

2.  The  main  classes  of  non-material  wants  that  are  sec-  Desires  for 
ondarily  economic  are  fear  of  temporal  punishment:  senti-  thenon- 

itifltcrifl.1 

ments  of  moral  and  religious  duty;  pride,  honor,  and  fear  may 
of  disgrace;  and  pleasure  in  work  for  itself,  for  social  ap-  become. 

economic 

proval,  or  for  a  social  result.    The  first  is  best  illustrated  by 


motives 


slavery,  where  the  slave  is  not  impelled  to  seek  wealth  for     '  ^ 
his  own  welfare,  but  is  driven  by  punishment  to  perform  the 
task.     The  object  is  to  create  within  the  mind  of  the  slave 
a  motive  that  will  take  the  place  of  the  ordinary  economic 
motive.     The  feeling  of  religious  or  moral  duty  leads  men 
to  act  often  in  direct  opposition  to  the  usual  economic  mo- 
tive.   The  taboo  is  faithfully  observed  by  the  members  of  a 
savage  tribe  who  suffer  as  a  result  the  severest  hardships. 
A  religious  injunction  prevents  the  use  of  food  that  would  * 
save  from  starvation.    Pride,  either  of  family  or  of  calling;^ 
the  soldier's  honor  leading  him  to  sacrifice  not  only  his  fu-;: 
ture  but  his  life ;  the  love  of  social  approval,  holding  men  to 
the  most  disagreeable  tasks— these  illustrate  how  strongly 
social  sentiments  oppose  the  narrower  motive  of  immediate 
self-interest  as  generally  thought  of.     Pleasure  in  work  for 
work 's  sake,  and  pride  in  the  result,  may  act  as  motives  quite 
as  strong  in  some  cases  as  desire  for  the  product  that  can 


14 


ECONOMIC  MOTIVES 


[CH.2 


Economists 
must  over- 
look no 
influence  on 
value 


be  used.  And  even  where  this  does  not  change  the  kind  of 
work  done,  it  comes  in  to  influence  the  interest  and  earnest- 
ness with  which  the  work  is  performed. 

3.  Whatever  motive  in  man's  complex  nature  makes  him 
desire  things  more  or  less,  becomes  for  the  time,  and  in  so 
far,  an  economic  motive.  These  various  social  and  spiritual 
motives  sometimes  work  positively,  in  the  direction  of  mag- 
nifying man's  desire  for  things;  sometimes  negatively,  to 
diminish  it.  jlf  we  are  to  understand  economic  action,  we  L 
must  take  men  as  they  are.  A  religious  motive  that  leads 
men  to  refrain  from  the  eating  of  meat  or  to  eat  fish  in 
preference  on  certain  days,  is  a  fact  which  the  economist  has 
but  to  accept,  for  it  is  sure  to  affect  the  value  of  meat  and 
fish  at  that  place  and  time.  (^Moral  convictions,  whatever 
be  their  origin,  whether  due  to  the  teaching  of  parents,  to 
unconscious  influences,  or  to  native  temperament,  may  be 
quite  as  effective  as  the  pangs  of  hunger  in  determining 
what  men  desire.)  Therefore,  while  these  various  motives 
are  primarily  social  or  moral  or  religious,  they  may  be  said 
to  be  secondarily  economic  motives,  and  they  may  become  in 
certain  cases  the  most  important  influences  of  -which  the 
economist  must  take  account.) 


CHAPTER  3 
WEALTH  AND  WELFARE 

§  I.      THE    RELATION   OP    MEN    AND    MATERIAL    THINGS   TO   ECO- 
NOMIC   WELFARE 

1.  The  gratifying  of  economic  wants  depends  on  things  Man  is  the 
outside  of  the  man  who  feels  the  wants.    Man  is  to  himself  ^omic 
the  center  of  the  world.     He  groups  things  and  estimates  reasoning 
things  with  reference  to  their  bearing  on  his  desires,  be  these 

what  are  called  selfish  or  unselfish.  If  we  were  discussing 
the  economics  of  an  inferior  species  of  animals,  things  would 
be  grouped  in  a  very  different  way.  But  economics  being 
the  study  of  man's  welfare,  everything  must  be  judged  from 
his  standpoint,  and  things  are  or  are  not  of  economic  im- 
portance according  as  they  have  relation  to  his  wants  and 
satisfactions.  Things  needful  for  any  of  the  lower  animals 
are^ spoken  of  as  "ministering  to  welfare"  in  the  economic 
sense  only  in  case  these  animals  are  useful  to  men.  Ex- 
amples are  the  mulberry-tree  on  which  the  silkworm  feeds, 
the  flower  visited  by  the  honey-bee.  Injthe_aame_  view  some 
men  are  seen  to  minister  to  the  welfare  of  other  men  and 
therefore  bear  the  same  relation  for  the  moment  to  the  wel- 
fare of  the  others  as  do  material  things.  In  any  case  we 
study  man's  welfare  as  affected  by  the  world  which  sur- 
rounds him. 

2.  Material  things  and  natural  forces  differ  in  kind  and  Physical 
nature.     This  is  an  axiom  which  we  must  take  as  a  basis  ^^g 
for  reasoning  in  economics.     Things  have  certain  physical  able  fact 
qualities  quite  apart  from  any  action  or  influence  of  man. 

15 


16 


WEALTH  AND  WELFARE 


[CH.  3 


They  are  operated  on  by  mechanical  laws ;  the  force  of  gravi- 
tation causes  them  to  fall  at  a  certain  rate  under  given  con- 
ditions. They  differ  in  specific  gravity,  reflect  the  rays  of 
light,  absorb  or  transmit  heat.  All  these  things  are  for  man 
ultimate  physical  facts,  but  unless  he  knows  these  facts  he 
cannot  take  full  advantage  of  the  favorable  qualities  of 
things  or  weigh  properly  their  importance  to  his  welfare. 
Things  differ  in  a  multitude  of  ways  in  their  chemical  quali- 
ties. Niter,  charcoal,  and  saltpeter,  combined  in  certain  pro- 
portions, give  certain  reactions;  different  combinations  give 
various  results.  Solids  combine  to  form  gases,  and  liquids 
unite  to  form  solids,  and  these  qualities  and  reactions  of 
material  things  are  for  man  ultimate  truths  of  chemistry. 
Likewise  many  things  have  certain  physiological  effects. 
Sunshine  acts  on  living  bodies,  whether  plant,  animal,  or 
man,  in  certain  ways.  Some  plants  are  nourishing  to  man, 
others  are  poisonous.  If  man  were  not  on  the  earth,  things 
would  have  the  same  physical  and  chemical  qualities,  me- 
chanical laws  would  be  the  same  as  at  present  so  far  as  we 
can  conclude.  Man  cannot  change  the  nature  of  things; 
but  he  can  acquaint  himself  with  that  nature  and  then  put 
the  things  into  the  relations  where  a  given  result  will  fol- 
low. 

3.     As  a  result  of  these  differences,  things  have  different 
relations  to  wants.    These  various  qualities,  physical,  chem- 
psychoiogi-    ical,  physiological,  are  important  in  an  economic  sense  only 

cal  effects 


But  eco- 
nomics has 
to  do  with 


some 
definitions 


ag  ^ey  pro(juce  psychological  effects,  that  is,  as  they  affect 
the  feelings  and  judgments  of  men.  We  come  to  some 
general  thoughts  which  it  will  be  well  to  define. 
f;  Gratification  is  the  feeling  that  results  when  a  want  has 
^^  met^f  Feelings  are  hard  to  define  in  words;  the  best 
definition  is  found  in  the  experience  of  each  individual.  We 
can  only  say,  therefore,  that  gratification  is  the  attainment  of 
desire,  the  fulfilment  of  wants.  The  word  that  has  usually 
been  employed  in  this  sense  in  economic  discussion  is  "sat- 
isfaction"; but  by  its  derivation  and  general  usage  satisfac- 


$i]  MEN  AND  THINGS  17 

tion  means  "the  complete  or  full  gratification"  of  a  desire, 
and  this  meaning  is  quite  inconsistent  with  the  thought  in 
many  connections  in  which  the  word  is  used.  We  shall 
therefore  prefer  here  the  word  gratification,  and  its  cor- 
responding verb,  gratify. 

(^Wealth  is  the  collective  term  for  those  things  which  are     \i 
felt  to  be  related  to  the  gratification  of  wants?\  The  word  is 
applied  in  economic  discussion  to  any  part  of  those  things, 
no  matter  how  small.]  We  shall  have  occasion  later  to  de- 
fine and  discuss  this^term  more  fully. 

(Welfare,  in  an  immediate  or  narrow  sense,  is  the  same  as  1 
gratification  of  the  moment ;  in  a  broader  sense,  it  means  1 
the  abiding  condition  of  well-being.     We  have  here  a  dis-/ 
tinction  very  much  like  that  often  made  between  pleasure 
and  happiness.     If  we  think  of  only  the  present  moment, 
welfare  is  the  absence  of  pain,   and  the  presence  of  the 
pleasureable  feeling;  but  if  we  consider  a  longer  period  in 
a  man 's  life  or  his  entire  lifetime,  it  is  seen  that  many  things 
that  afford  a  momentary  gratification  do  not  minister  to  his 
ultimate,  or  abiding,  welfare.     Moralists  and  philosophers 
often  have  dwelt  on  this  contrast.     The  difference  is  illus- 
trated by  the  thoughtlessness  and  impulsiveness  of  a  child 
or  savage  as  contrasted  with  the  more  rational  life  of  those 
with  foresight  and  patience.) 

Wealth,  in  the  general  economic  sense,  is  judged  with  ref-  Economics 
erence  to  gratification  rather  than  with  reference  to  abid-  f 
ing  welfare.  /!F"is  the  first  duty  of  the  economist  not  to 
preach  what  should  be,  but  to  understand  things  as  they  are.  / 
He  must,  in  studying  the  problem  of  value,  recognize  any 
motive  that  leads  men  to  attach  importance  'to   acts  and 
things.     He  will  therefore  take  account  of  abiding  welfare 
and  pf  immediate  gratification  to  exactly  the  degree  that  men 
in  general  do,  and  the  sad  fact  is  that  the  present  impulse 
rules  a  large  part  of  the  acts  of  men.     Whether  tobacco  or 
alcohol  or  morphine  minister  to  the  abiding  happiness  of 
those  who  use  them  does  not  alter  the  immediate  fact  that 
2 


wealth 


18  WEALTH  AND  WELFARE 

Jiere  and  now  they  are  sought  and  an  importance  is  at- 

;ched  to  them  because  of  their  power  to  gratify  an  immedi- 
e  desire. 
5.     In  studying  the  question  of  social  prosperity,  how- 
ever,  we  must  rise  to  the  standpoint  of  the  social  philosopher 
and  consider  the  more  abiding  effects  of  wealth.     Wants 
may  be  developed  and  made  rational,  and  the  permanent 
prosperity  of  a  community  depends  upon  this  result.     Any 
species  of  animal  that  continued  regularly  to   enjoy  that 
which^ weakens  the  health  and  strength  would  become  ex- 
tinct)^ Any  society  or  individual  that  continues  to  derive 
(gratification,  to  seek  its  pleasure,  in  ways  that  do  not,  on  the 
/average,  minister  to  permanent  welfare,  sinks  in  the  strug- 
Igle  of  life  and  gives  way  to  those  men  or  nations  that  have 
|  a  sounder  and  healthier  adjustment  of  wants  and  welfare./ 
We  touch  here,  therefore,  on  the  edge  of  the  great  prob- 
lems of  morals,  and  while  we  must  recognize  the  contrast  that 
often  exists  in  the  life  of  any  particular  man  between  his 
"pleasures"  and  his  health  and  happiness,  we  see  that  there 
is  a  reason  why,  on  the  whole,  and  in  the  long  run,  these  two 
cannot  remain  far  apart.     The  old  proverbs,  "Be  virtuous 
and  you  will  be  happy,"  "Honesty  is  the  best  policy,"  and 
"Virtue  is  its  own  reward,"  have  a  sound  basis  in  the  age- 
long experience  of  the  worldJ)(  Cynics  or  jesters  may  easily 
disprove  these  truths  in  a  multitude  of  particular  casesM 

6.  Wealth  does  not  include  such  personal  qualities  as 
honesty,  integrity,  good  health.  Some  economists  speak  of 
these  as  "internal  goods,"  but  it  is  far  better  not  to  speak 
of  free  men  or  of  their  qualities  as  wealth.  Many  difficul- 
ties arise  from  such  a  use  of  the  term  in  practical  discussion. 
One  of  the  most  important  of  all  distinctions  to  maintain  in 
economics  is  that  between  material  things  and  men.  Only  in 
the  case  of  human  slavery  may  persons  be  counted  as  eco- 
nomic wealth.  It  is  a  different  thing,  however,  to  consider 
human  services  as  wealth  of  an  ephemeral  kind  at  the  mo- 
ment they  are  rendered.  We  are.  thj&s  merely  recognizing 


§11]  SOME   ECONOMIC   CONCEPTS  19 

that  men  may  bear  at  the  given  moment  the  same  relation  to 
our  wants  as  do  material  things. 

§  II.      SOME  IMPORTANT  ECONOMIC  CONCEPTS  CONNECTED  WITH 
WEALTH   AND   WELFARE 

1.  Utility,  in  its  broadest  usage,  is  the  general  capability  Popular 
that  things  have  of  ministering  to  human  well  being.     The  meaninsof 
term  is  evidently  one  without  any  scientific  precision.     It 
expresses  only  a  general  or  average  impression  that  we  have 

in  reference  to  the  relation  of  a  class  of  goods  to  human 
wants.  Every  one  would  agree  to  the  statement  that ' '  water 
is  useful,"  thinking  of  the  fact  that  it  is  indispensable  to 
life  and  that  it  ministers  to  life  in  a  multitude  of  ways.  But 
what  of  water  in  one's  cellar,  water  soaking  one's  clothes 
on  a  cold  day,  water  breaking  through  the  walls  of  a  moun- 
tain reservoir  and  carrying  death  and  destruction  in  its 
path?  The  poison  that  is  doing  what  we  at  the  moment 
desire,  we  call  useful ;  that  doing  what  we  would  prevent, 
we  call  harmful.  Noxious  weeds  become  "useful"  by  the 
discovery  of  some  new  process  by  which  they  can  be  worked 
into  other  forms,  though  they  may  still  continue  to  be  noxious 
in  many  a  farmer 's  fields.  The  utility  of  anything,  therefore, 
is  seen  to  be  of  a  relative  and  limited  nature.  The  term 
"utility"  in  popular  speech  is  very  inexact.  It  can  be 
employed  in  economic  discussion  only  when  carefully  modi- 
fied and  defined. 

2.  Goods  consist  of  all  those  things  objective  to  the  user  Kinds  of 
which  have  a  beneficial  relation  to  human  wants.    They  fall  g 
into  several  classes.    We  may  first  distinguish  between  free 

and  economic  goods.  Free  goods  are  things  that  exist  in 
superfluity,  that  is,  in  quantities  sufficient  not  only  to  gratify, 
but  to  satisfy  all  the  wants  that  may  depend  on  them. 
Economic  goods  are  things  so  limited  in  quantity  that  all  of 
the  wants  to  which  they  could  minister  are  not  satisfied. 
The  whole  thought  of  economy  begins  with  scarcity;  in- 


20  WEALTH  AND  WELFARE  [CH.  3 

deed,  even  the  conception  of  free  goods  is  hardly  possible 
until  some  limitation  of  wants  is  experienced.  Practical 
economics  is  the  study  of  the  best  way  to  employ  things 
to  secure  the  highest  amount  of  gratification.  The  problem 
itself  arises  out  of  the  fact  that  many  things  are  used  up 
before  all  wants  dependent  on  them  are  completely  satisfied. 

A  distinction  is  often  made  between  consumption  and 
production  goods,  or  it  may  be  better  to  say  immediate  and 
intermediate  goods.  Consumption  goods  are  those  things 
which  are  immediately  at  the  point  of  gratifying  man's 
desires.  Production  goods  are  those  things  which  are  not  yet 
ready  to  gratify  desires;  some  of  them,  being  merely  means 
of  securing  consumption  goods,  never  will  themselves  im- 
mediately gratify  desire. 

3.  Value,  in  the  narrow  personal  sense,  may  be  defined 
as  the  importance  attributed  to  a  good  by  a  man.  The 
vagueness  and  inexactness  of  the  word  ' 'utility,"  or  the 
word  "good,"  disappears  when  we  reach  the  word  "value." 
It  is  not  a  usual  relation  or  a  vague  degree  of  benefit  some- 
times present  and  sometimes  absent,  but  it  refers  to  a  par- 
ticular thing,  person,  time,  and  condition.  Value  is  in  the 
closest  relation  with  wants,  and  in  this  narrow  sense  de- 
pends on  the  individual's  estimate.  From  the  meeting  and 
comparison  of  the  estimates  of  individuals,  arise  market 
values  or  prices,  which  are  the  central  object  of  study  in 
economics. 


CHAPTER  4 
THE   NATURE    OF   DEMAND 

§1.      THE  COMPARISON  OF  GOODS  IN  MAN'S  THOUGHT 

1.  As  ivants  differ  in  kind  and  degree,  so  goods  differ  in  wants  and 
their  power  to  gratify  wants.    This  general  and  simple  state-  JJ^f"1 
ment  unites  the  leading  thoughts  of  the  two  chapters  pre-  stantiy 
ceding.    Confirmation  of  its  truth  may  be  found  in  observa-  adjus 
tion  and  experience.    The  purpose  of  this  chapter  is  to  show 

how,  starting  from  the  general  nature  of  wants  and  the  na- 
ture of  goods,  we  can  arrive  at  an  explanation  of  the  exchange 
of  goods.  Recognizing  the  simple  but  fundamental  fact 
stated  at  the  opening  of  this  paragraph,  an  exchange  may  be 
seen  to  be  a  rational  and  a  logical  result  when  men  are 
living  together  in  society. 

2.  Immediately  enjoyable  goods  are  the  first  objective  Ripe  and 
things  whose  value  is  to  be  explained.    Goods  come  into  rela-  unnpegood 
tion  with  wants  in  a  multitude  of  ways.     Some  things  will 

not  gratify  a  want  until  after  the  lapse  of  a  long  time,  as 
ice  cut  in  December  and  stored  for  summer  use.  Other 
things  will  never  themselves  directly  gratify  a  want,  but 
will  be  of  help  in  getting  things  that  do ;  such  are  the  young 
fruit  trees  planted  in  the  orchard,  and  the  hammer  that  will 
be  used  to  drive  nails  in  a  house  that  will  shelter  men.  Still 
other  things  are  gratifying  wants  at  this  moment,  or  are 
ready  for  use  and  will  be  used  up  in  a  very  short  time ;  exam- 
ples of  such  are  the  food  on  the  table  and  in  the  pantry,  and 
the  cigar  in  the  pocket.  All  these  things  are  called  goods, 
because  of  their  beneficial  relation  to  man's  desires,  but  the 

21 


22  THE  NATUEE  OF  DEMAND  [OH.  4 

relation  is  very  immediate  in  some  cases,  very  remote  in 
others.  The  value  of  all  goods  is  to  be  explained,  but  the 
explanation  will  be  more  or  less  complex  according  to  the 
directness  or  indirectness  of  their  relation  with  wants.  As 
it  is  the  power  of  goods  to  gratify  wants  that  alone  causes 
value  to  be  attributed  to  them,  those  goods  which  are  ripest, 
which  are  ready  to  gratify  wants,  are  nearest  to  the  source 
of  an  explanation.  The  value  of  unripe  enjoyments  must  be 
traced  to  some  expected  gratification  as  its  cause  or  basis. 
In  order  to  attack  the  difficulties  one  by  one  we  will,  therefore, 
in  the  following  discussion,  deal  first  with  this  class  of  ripe, 
consumable  goods,  as  food,  personal  services,  enjoyments  of 
any  sort  that  are  immediately  available.  The  explanation 
of  these  cases  of  value  must  precede  that  of  cases  in  which 
the  relation  to  wants  is  less  obvious  and  direct. 

3.  As  the  amount  of  any  good  increases,  after  a  certain 
point  the  gratification  that  the  added  portions  afford  de- 
creases. This  is  called  the  law  of  the  diminishing  utility  of 
goods  or  of  the  decreasing  gratification  afforded  by  goods. 
The  reason  for  the  truth  of  this  proposition's  found  in  the 
very  nature  of  man  and  his  nervous  organization.  Any  stim- 
ulus to  the  nerves,  however  pleasant  at  first,  becomes  painful 
when  long  continued  or  increased  unduly.  The  trumpet  too 
distant  at  first  for  the  ear  to  distinguish  its  notes,  may  swell 
to  pleasing  tones  as  it  approaches,  until  at  length  its  volume 
and  its  din  may  become  absolutely  painful.  If  we  were 
to  express  the  degree  of  gratification  by  a  curve,  we  should 
see  the  curve  rising  gradually  to  a  maximum,  and  then 
falling  somewhat  suddenly  and  becoming  a  negative  quan- 
tity, when  pain,  not  pleasure,  resulted.  The  same  change 
could  be  illustrated  by  any  sensation  or  by  any  of  men's 
activities. 

The  proposition  must  be  understood  as  applying  to  the 
gratification  resulting  from  each  added  portion  of  the  sen- 
sation. There  is  a  maximum  point  in  the  gratification  af- 
forded by  any  nerve-stimulus.  A  man  coming  in  from 


§1]  COMPARISON  OF   GOODS  IN  MAN'S   THOUGHT  23 

the  winter's  storm  and  holding  out  his  hands  before  the 
fire,  feels  an  intense  pleasure  in  the  grateful  warmth ;  a  few 
moments  later,  the  same  heat  becomes  unpleasant.  In  win- 
ter we  wish  for  a  moderation  of  the  temperature;  on  the 
sultry  days  of  summer,  we  think  of  a  cool  breeze  as  the  most 
to  be  desired  of  all  things.  Whether  the  temperature  rises 
or  falls,  there  is  a  point  beyond  which  the  change  is  no 
longer  an  addition  to,  but  a  subtraction  from,  pleasure.  A 
man,  however  hungry  at  first,  may  be  made  miserable  if 
forced  to  eat  beyond  his  capacity.  Each  added  portion  of  the 
good  consumed  contributes  to  the  gratification  up  to  a  certain 
point.  The  sum  of  these  pleasurable  sensations  may  be 
called  the  total  gratification,  which  finally  reaches  satisfac- 
tion or  fullness.  Then  begins  what  may  be  called  in  alge- 
braic phrase  a  ' '  negative  gratification  ' '  which,  if  it  becomes 
large  enough,  will  make  the  total  gratification  a  negative 
quantity.  Each  added  portion,  dose  or  increment  beyond  a 
certain  point  reduces  thus  the  welfare  of  the  user.  One 
may  have  too  much  of  a  good  thing. 

4.  Marginal  utility  is  the  gratification  afforded  by  the  Themar- 
added  portion  of  the  good.  The  marginal  dose,  increment,  or  ^nalutillty 
portion  is  that  which  may  be  logically  considered  asjjcoming 
last  in  the  case  of  any  good  or  group  of  goods  divisible  into 
small  parts.  In  considering  the  strict  theory  of  the  case, 
in  order  to  get  at  the  principle  involved,  the  doses  may  be 
spoken  of  as  infinitesimal ly  small.  The  marginal  utility  ex- 
presses the  importance  that  men  attach  to  one  unit  of  this 
kind  of  goods  under  the  particular  circumstances  at  the 
moment  existing,  and  not  under  certain  conceivable  con- 
ditions which  do  not  in  fact  exist  or  need  to  be  taken 
into  account  by  the  persons  affected.  The  marginal  unit 
of  a  homogeneous  supply  cannot  be  considered  to  have  a 
greater  utility  than  any  other  unit  at  the  moment,  and  there- 
fore the  product  of  the  marginal  utility  by  the  number  of 
units,  gives  the  total  measure  of  importance  of  the  supply 
then  and  there,  and  this  is  the  value. 


24 


THE  NATURE  OF  DEMAND 


[OH.  4 


TJie ...value i.of_ggpds,  as  has  been  indicated,  is  the  measure 
of  the  dependence  felt  by  men  on  a  portion  of  the  outer 
worldj__as  the  condition  of  gratifying  their  wants.  From 
the  very  nature  of  wants,  which  reside  in  feelings,  a  de- 
pendence that  is  not  felt,  a  relation  between  things  and 
gratification  that  is  not  recognized,  can  have  no  influence 
on  value.  Now,  it  is  at  this  margin  of  supply  that  depen- 
dence is  felt.  Men  do  not  concern  themselves  about  that 
which  they  have  in  superfluity— unless,  indeed,  the  excess 
causes  them  some  discomfort.  It  is  well  that  they  do  not, 
for  a  wise  direction  of  effort  can  only  take  place  when  men 
think  mainly  of  their  need  of  things  that  they  want,  and 
want  most,  and  direct  their  efforts  toward  securing  them. 

The  diminishing  utility  of  successive  portions  (doses  or 
increments,  as  they  are  called)  may  be  represented  by  a 
curve  of  utility. 


.!\ 


Scale     of    Supply 


The  diagram  is  constructed  on  the  hypothesis  that  a  tenth 
unit  of  a  certain  good  would  have  a  utility  expressed  as 
36;  a  fifteenth  unit  of  30,  etc.,  and  that  the  value  of  the 
whole  supply  is  estimated  according  to  these  marginal  units. 
Of  course  if  the  conditions  were  that  ''all  or  none"  was  to  be 
taken,  the  result  would  be  different. 


§IJ  COMPARISON  OF  GOODS  IN  MAN'S  THOUGHT  25 

Unit  of  Supply  Marginal  Utility  Value  of  Whole  Supply 

10  36  360 

15  30  450 

20  25  500 

30  19  570 

40  15  600__ 

50  10  500 

60  5  300 

This  diagram  is  frequently  used,  and  it  is  important  to 
guard  against  some  misunderstandings.  The  marginal  unit 
of  any  given  supply— for  example,  ten  units— is  not  any  par- 
ticular unit,  it  is  any  one  of  the  ten  units.  In  the  presence 
of  nine  units  of  the  good  the  person  or  persons  find  all  the 
various  wants  that  are  dependent  on  that  good  gratified  to 
such  a  degree  that  the  tenth  unit  has  an  importance  expressed 
by  36.  But  as  this  last  or  marginal  unit  of  supply  may 
be  used  for  any  of  the  purposes,  the  importance  of  each 
and  every  unit  likewise  will  be  'expressed  by  36.  Any  one 
of  the  units,  when  once  present  is,  in  a  logical  sense,  a 
marginal  unit.  When,  however,  it  is  a  question  of  increasing 
the  supply,  some  one  unit  may  properly  be  looked  upon  as 
marginal.  The  dependence  felt  by  men  on  the  whole  group  is 
the  product  of  the  units  by  the  marginal  utility.  As  the 
number  of  units  increases,  the  marginal  utility  decreases, 
until  at  length  it  may  reach  zero,  and  the  total  value  would  be  ' 
nothing.  A  point  of  maximum  value  evidently  will  be  found 
somewhere  between  the  two  extremes.  ^ 

Note  carefully  that  on  the  one  diagram  are 'represented  a  omyone 
large  number  of  marginal  utilities  which  never  exist  at  one  JJJJJ1?^ 
and  the  same  moment.    At  any  one  moment  there  is  a  given  one  mom 
number  of  units  and  there  is  but  one  marginal  utility,  and 
this  is  the  same  for  each  of  the  units.    It  is  quite  erroneous  to 
say  that  when  there  are  30  units  the  utility  of  the  tenth  unit 
is  36 ;  of  the  twentieth,  25 ;  of  the  thirtieth,  19.    It  is  equally 
incorrect  to  say  that  when  there  are  60  units  the  "total  util- 
ity "  is  equal  to  the  area  between  the  right  angle  and  the 


26  THE  NATURE  OF  DEMAND  [CH.  4 

curve  a-g,  while  the  value  is  equal  to  the  rectangle  below 
and  to  the  left  of  the  point  g.  The  curve  from  a-g  but 
marks  the  height  of  marginal  utilities  that  have  no  existence 
when  the  supply  is  30.  The  "  total  utility,"  often  spoken  of 
in  this  connection,  if  it  has  any  existence  certainly  cannot  be 
calculated.  The  diagram  must  be  understood  as  representing 
indicatively  at  any  given  moment  but  one  marginal  utility, 
the  same  for  every  unit  of  like  goods.  The  other  perpendic- 
ular lines  are  expressed  in  the  conditional  mood;  they  are 
what  the  marginal  utility  would  be  were  the  numbers  of 
units  different. 

5.  Since  goods  possess  utility  only  as  they  gratify  wants, 
it  follows  that  if  wants  change,  the  utility  changes.  Utility 
does  not  rest  unchanging  in  the  goods  as  something  ' c  intrin- 
sic,"  but  it  depends  on  the  relation  of  goods  to  men.  This 
truth,  unrecognized  for  many  centuries,  is  now  seen  to  be 
fundamental  to  the  whole  problem  of  value.  The  portions 
of  a  good  added  later  do  not  appeal  to  the  same  man  as  the 
earlier  portions.  The  man  has  been  changed  by  what  he  has 
enjoyed.  In  changing  his  feelings,  goods  have  also  changed 
his  wants.  Hence,  the  added  portions  of  the  good  are  changed 
in  respect  to  their  utility  or  power  to  gratify  a  man's  wants. 
Though  physically  and  chemically,  i.e.,  in  every  material 
way,  they  are  exactly  like  the  earlier  portions,  they  cannot 
have  the  same  want-gratifying  power  until  he  again  changes, 
for  they  are  not  in  the  presence  of  the  same  feelings. 
/  Wants  are  constantly  shifting;  different  kinds  of  goods 
I  are  compared  in  man's  thought  and  arranged  on  a  scale  at 
Vevery  moment  according  to  their  felt  utility.  An  increase 
in  the  amount  of  a  good  will  drop  the  marginal  utility  of  the 
added  portions  down  the  scale  of  usefulness  for  the  next 
moment.  When  we  rise  in  the  morning,  we  want  our  tireak- 
fast;  the  breakfast  eaten,  another  breakfast  does  not  appeal 
to  us.  Our  tasks  done,  we  take  a  boat-ride  or  go  golfing; 
then,  appetite  returning,  we  are  tempted  to  our  dinner.  And 
thus  from  hour  to  hour  wants  are  gratified,  are  altered  and 


§H]  DESIRE  BECOMES  DEMAND  27 

are  shifted,  until,  wearied  with  the  day 's  labor  and  pastimes, 
we  go  to  rest.  In  a  well-ordered  life,  in  an  advanced  eco- 
nomic society,  the  means  for  gratifying  our  wants  as  they 
arise  are  provided  in  advance.  The  changing  series  of  desires 
is  met  by  a  changing  series  of  goods.  Life  has  been  defined 
as  a  constant  adjustment  of  inner  relations  to  outer  con- 
ditions. Economic  life  is  therefore  like  physical  life,  a  con- 
stant adjustment;  and  this  adjustment  of  goods  but  reflects 
the  shifting  and  adjustment  of  feelings.  t 

6.  The  substitution  of  goods  in  men's  thought  is  the  choice  is 
shifting  of  the  choice  from  a  good  that  does  not  give  the 
highest  gratification  economically  possible  at  the  time,  to 
another  good  that  does.  The  shifting  that  takes  place  on  the 
scale  of  gratification  makes  it  necessary  for  man  to  shift 
constantly  his  choice  of  goods.  This  again  is  the  problem 
of  ''economy."  Waste  results  when  goods  continue  to  be 
used  to  secure  a  lower  degree  of  gratification,  if  they  might 
be  used  to  secure  a  higher.  The  change  of  choice  may  be 
because  of  a  change  in  the  man,  or  because  of  a  change  in  the 
quality  or  the  quantity  of  the  goods ;  or  because  of  a  change 
in  the  ratio  at  which  the  goods  can  be  secured. 


§  II.   DEMAND  FOR  GOODS  GROWS  OUT  OF  SUBJECTIVE  COM- 
PARISONS 

1.  Demand  is  desire  for  goods  united  with  the  power  to  Desire  may 
give  something  in  exchange.  An  example  frequently  given 
to  show  the  difference  between  desire  and  demand  is  the 
hungry  boy  looking  longingly  at  the  sweetmeats  in  the  con- 
fectioner's window.  He  represents  desire,  but  not  until  the 
kind-hearted  gentleman  gives  him  a  nickel  does  he  represent 
effective  demand.  Desire,  therefore,  must  be  united  with 
power  to  give  something  in  exchange  before  it  can  be  called 
demand.  It  must  be  for  something  that  is  attainable; 
yearning  for  something  beyond  reach,  sighing  for  the  moon, 
is  desire  that  never  can  become  effective  demand. 


28 


THE  NATURE  OF  DEMAND 


[CH.  4 


2.  Demand  is  the  social  aspect  of  the  individual  man's 
comparison  of  utilities.     It  is  the  expression  of  the  man's 
wish  to  substitute  some  of  his  goods  for  some  one  else's 
goods  in  order  to  get  a  higher  satisfaction.     This  compari- 
son is  often  made  between  two  goods  owned  in  different 
quantities.    When  men  are  constantly  comparing  things  in 
their  own  possession,  it  is  a  short  step  to  compare  their 
goods  with  their  neighbor's. 

Demand  for  consumption  goods  is  thus  the  manifestation 
of  the  man's  desire  to  redistribute  his  enjoyments.  In  de- 
mand for  goods  men  virtually  say :  '  *  Part  of  what  I  have  I 
am  ready  to  give  for  part  of  what  you  have. ' '  The  strength 
of  their  desire  is  expressed  by  the  amount  of  their  offer. 
When  he  makes  this  comparison  and  this  offer,  man  enters 
kinto  a  social,  economic  relation  with  his  fellows. 

3.  The  law  of  individual  demand  is:  The  trader  will  re- 
duce his  stock  of  a  particular  good  to  the  point  where  its 
marginal  utility  equals  that  of  the  alternative  goods.     The 
greater  the  divergence  in  his  estimates  of  the  marginal  utili- 
ties of  two  goods,  the  more  ready  is  he  to  trade  the  lower 
utility  for  the  higher  one.     Exchange  is  but  the  effort  to 
adjust  goods  to  wants  in  the  best  way.     The  less  useful 
(marginally  viewed)   is  traded  for  the  more  useful.     The 
greater  the  difference,  in  the  one  trader's  judgment,  between 
the  marginal  utilities  of  the  two  goods,  the  greater  is  the 
maladjustment,   and  the   greater,   therefore,   is  the  motive 
to  seek  readjustment  by  means  of  exchange.    As  the  quan- 
tity of  the  good  parted  with  declines,  its  marginal  utility 
increases;  and  as  more  of  the  other  good  is  acquired,  its 
marginal  utility  declines.     The  marginal  utility  of  the  two 
exchangeable  units  must  come  to  equilibrium  in  the  indi- 
vidual's judgment.     At  this  point  demand  ceases,  not  be- 
cause an  additional  unit  of  the  one  good  could  afford  no 
gratification,  but  because  it  would  afford  less  gratification 
than  the  other  good  in  which  demand  must  be  expressed  to 
be  effectual. 


§11]  DESIRE  BECOMES  DEMAND  29 

LX 

4.  Demand  thus  varies  at  different  ratios  of  exchange  The  demand 
between  goods,  and  may  be  expressed  graphically  by  a  de-  cunre 
mand  curve.    This  would  show  for  any  one  man  the  decline 

of  the  marginal  utility  of  each  added  portion  of  a  good,  and 
these  individual  demand  curves  may  be  united  into  a  de- 
mand curve  for  a  group  of  men.  Qche  demand  curve  ex.- 
|f  presses  graphically  what  a  man  would  be  willing  to  pay  at 
each  particular  stage  in  the  increase  of  goods.  We  have  here 
come  to  the  very  threshold  of  the  subject  of  markets  and  ex- 
change. 

5.  Elasticity  of  demand,  in  the  case  of  any  good,  ex-  Elasticity 
presses  the  degree  in  which  a  change  in  its  ratio  to  other  ° 
goods  will  increase  the  demand.     Elasticity  varies  for  dif- 
ferent classes  of  men  according  to  their  wealth  and  to  the  cost 

of  the  goods.  If  strawberries  are  a  dollar  a  box  in  the  city 
market,  a  slight  fall  in  the  price,  say  to  seventy-five  cents, 
will  increase  the  demand  but  slightly.  But  if  the  price  is 
fifteen  cents  and  falls  to  ten,  the  increase  in  the  demand 
will  be  marked,  for  the  number  of  consumers  to  whom 
a  difference  of  five  cents  is  important  is  then  very  great. 
The  demand  for  the  staples  is  comparatively  inelastic.  A 
certain  amount  of  simple  food  is  necessary  to  support  life; 
an  increase  in  its  price  will  not  quickly  check  the  demand. 
On  the  other  hand,  if  the  price  of  staple  foods  falls,  no  very 
great  increase  will  take  place  in  the  demand. 


Reciprocal 
demand 
becomes  ex- 
change 


CHAPTER  5 
EXCHANGE    IN   A   MARKET 

§  I.       EXCHANGE   OF    GOODS   RESULTING   FROM    DEMAND 

1.  Exchange  in  the  usual  economic  sense  is  the  transfer 
of  two  goods  ~by  two  owners,  each  of  whom  deems  the  good 
taken  more  than  a  value-equivalent  for  the  one  given.  The 
comparison  of  goods  that  has  been  discussed  above  is  a.  Jf ind 
of  jBxchange.  When  a  person  chooses  one  thing  rather  than 
another,  one  form  of  gratification  may  be  said  to  be  mentally 
exchanged  for  another.  This  is  exchange  in  that  person's 
mind,  or  subjective  exchange.  But  the  word  "exchange"  as 
usually  employed  means  an  exchange  of  goods  between  per- 
sons. It  is  objective  exchange,  and  when  the  word  is  used 
without  modification,  it  is  to  be  understood  in  the  objective 
sense.  In  the  last  chapter  were  analyzed  the  motives  of  the 
individual  man.  Robinson  Crusoe  on  his  desert  island  would 
in  very  many  ways  be  acted  upon  by  the  same  motives  in 
reference  to  economic  goods  that  men  are  in  society.  Yet,  it 
is  exchange  in  society  and  the  complicated  problems  arising 
from  this  transfer  of  goods  from  person  to  person  that  con- 
stitute nearly  the  whole  of  the  subject-matter  of  political 
economy. 

Exchange  is  seen  to  arise  out  of  the  differences  in  the  sit- 
uations of  men  with  reference  to  goods.  The  different  sub- 
jective valuations  give  rise  to  demand,  and  demand  leads  to 
exchange.  In  early  societies  differences  in  natural  products 
were  the  most  usual  causes  of  exchange.  Salt,  though  so 
essential  to  life,  is  found  in  few  places.  The  metals  early  be- 

30 


EXCHANGE  OF  GOODS  RESULTING  FROM  DEMAND   31 

ime  indispensable  for  weapons  of  defense  or  for  the  chase, 
md  were  sought  far  and  wide.  Rare  shells,  feathers,  jewels, 
and  the  precious  metals  appealed  in  early  times  to  a  uni- 
versal desire  for  ornament.  Products  like  these  are  the  ob- 
jects of  a  rude  sort  of  exchange  in  the  first  simple  efforts 
tade  to  adjust  possessions  to  wants.  Within  the  tribe,  dif- 
ferences in  the  skill  and  ability  of  men  to  produce  arrow 
leads  or  weapons  or  ornaments,  bring  about  the  exchange 
fof  goods. 

2.  The  advantage  of  exchange  consists  in  the  raising  of  the  Mutual 
want-gratifying  power  of  goods  to  both  parties.    It  generally  advantase 
was  assumed  by  medieval  thinkers  that  if  one  party  to  an 
exchange  gained,  the  other  must  lose.     The  mistaken  idea 
prevailed  that  value  is  something  fixed  in  the  good,  and. 
unchangeable.    Where  the  exchange  is  voluntary  (and  only 

that  kind  is  here  being  considered),  it  is  mutual  advantages 
which  make  the  exchange  rational.  Many  false  conclusions 
on  practical  questions  still  result  from  a  failure  to  grasp 
this  simple  truth.  It  follows  from  this  that  the  act  of 
exchange  is  itself  useful,  for  goods  having  a  small  importance 
to  men  are  given  a  higher  importance  by  being  brought  into 
better  relations  with  wants.  Merchants,  peddlers,  traders, 
and  common  carriers  of  all  sorts,  therefore,  are  adding  to 
the  utility  of  goods.  This  idea  has  been  only  slowly  ap- 
prehended, but  is  now  one  of  the  least  disputed  propositions 
in  economics. 

3.  Barter  is  the  exchange  of  goods  without  the  use  of  Demand  is 
money.     Either  one  of  the  goods  traded  in  cases  of  barter  ^^grm 
may    be    considered    as    sold,    and    either    one    as    bought,  aspect 
according  as  the  matter  is  looked  at  from  the  standpoint  of 

the  one  or  the  other  party  to  the  exchange.  JDemand,  there- 
fore, is  supply,  and  supply  is  demand_when  the  point  of 
view  is  shifted  from  one  party  to  another.  The  fisherman's 
demand  for  venison  is  expressed  in  terms  of  fish;  the 
hunter's  demand  for  fish  is  expressed  in  terms  of  venison. 
But  to  the  fisherman  the  venison  is  the  supply  offered  to 


32 


EXCHANGE  IN  A  MARKET 


[CH.  5 


him.  The  term  "marginal  utility"  of  a  good,  therefore, 
does  not  refer  merely  to  the  demand  of  the  consumer ;  for  it  | 
expresses  by  a  single  phrase  the  idea  both  of  demand  and 
of  supply.  The  utility  of  the  goods  composing  the  supply  is 
expressed  in  terms  of  the  goods  that  represent  demand  and 
vice  versa.  The  only  way  in  which  man  can  give  definite, 
concrete,  numerical  expression  to  his  desire  for  goods  is  to 
state  it  in  terms  of  other  goods.  In  expressing  numerically, 
in  terms  of  other  objects,  an  estimate  of  the  utility  of  an 
apple,  a  horse  or  a  house,  one  inevitably  gives  expression  to  a 
ratio  of  exchange;  demand  for  one  good  is  the  offer  of  an- 
other good. 


1 


In  isolated 
exchange 
the  price  is 
not  econom- 
ically fixed 


§  II.       BARTER    UNDER    SIMPLE    CONDITIONS 

1.  In  isolated  exchange,  ivhere  only  two  traders  engage 
in  barter,  their  estimates  give  respectively  the  upper  and 
the  lower  figures  of  the  ratio  at  which  the  trade  can  take 
place.  Let  us  recall  the  fact  that  a  difference  in  the  relative 
estimates  that  men  place  on  goods  is  the  first  essential  of 
exchange.  Those  estimates  may  be  expressed  in  a  ratio; 
we  may  say  that  A  will  give  four  apples  for  one  orange, 
would  be  glad  to  give  fewer,  but  will  not  give  more;  while 
B  will  give  one  orange  for  three  apples,  would  be  glad  to 
get  more  apples,  but  will  not  take  fewer.  The  outside  limits 
of  the  ratio  at  which  the  exchange  must  take  place  will,  there- 
fore, be  one  orange  for  three  or  four  apples. 

A,  seller  of  apples,  offers  4  (or  fewer)  apples  for  1  orange. 

B,  buyer  of  apples,  demands  3   (or  more)    apples  for  1 
orange. 

There  is,  in  entirely  isolated  exchange,  therefore,  a  lack 
of  definiteness  in  the  price,  much  depending  on  what  Adam 
Smith  called  the  ' '  higgling  of  the  market. ' '  In  the  old-time 
American  horse  trade  much  depended  on  ' '  bluff " ;  in  such 
cases  it  was  as  important  to  be  able  to  judge  character  as  to 
judge  horses.  A  thorough  analysis  of  the  trade,  however, 


§H]  BARTER  UNDER  SIMPLE  CONDITIONS  33 

would  probably  show  that  the  bargain  is  concluded  at  a 
point  which  exactly  balances  the  hopes  of  gain  and  fears  of 
loss  of  one  of  the  parties. 

2.     Where  one-sided  competition  exists,  the  ratio  of  the  competitive 
exchange  will  be  somewhere  between  the  estimates  of  the  biddin£ 

narrows  the 

two  buyers  most  eager  for  the  last  portion  offered.  By  com- ^  limits  of 
petition  is  here  meant  the  independent  seeking  of  the  same  pnce 
thing  at  one  time  by  two  or  more  persons.  Where  there  is 
one  market  price  paid  by  a  number  of  buyers,  it  may  be  that 
no  two  of  the  subjective  estimates  are  alike;  the  exchange 
value  may  differ  from  all  of  their  estimates,  and  yet  must 
correspond  closely  to  two.  Auction  sales  well  illustrate  the 
principle.  If  there  is  one  ax  to  be  sold  and  ten  possible 
buyers  for  an  ax,  and  there  is  no  combination  among  them, 
the  bidding  will  go  on  until  the  estimate  of  the  buyer  next 
to  the  most  eager,  has  been  reached.  The  most  eager  buyer 
can  then  secure  the  ax  by  bidding  just  a  little  above  his 
next  competitor.  But  if  there  are  ten  axes  and  ten  buyers 
who  know  that  there  will  be  ten  axes  offered,  the  more  eager 
buyers  will  refuse  to  bid  much  above  the  less  eager  ones.  A 
shrewd  auctioneer,  therefore,  often  conceals  the  fact  that 
there  is  more  than  one  of  an  article,  and  having  sold  it  off, 
brings  out  a  second  or  a  third  one  of  the  same  kind,  thus 
keeping  the  buyers  in  ignorance  of  the  supply  and  getting 
somewhere  near  the  estimate  of  the  most  eager  buyer  in 
each  case.  Advertisements  of  "a  limited  supply,"  "the  last 
chance,"  "positively  the  last  appearance,"  are  meant  to 
stimulate  the  demand  of  the  patrons,  and  to  lead  them  to 
buy  at  once.  In  general,  therefore,  where  competition  ex- 
ists on  one  side,  price  is  fixed  with  greater  definiteness  than 
in  isolated  exchange.  Not  so  much  depends  on  shrewd  bar- 
gaining, on  bluff,  or  on  the  stubbornness  of  an  individual. 
Far  more  depends  on  forces  outside  the  control  of  any  one 
man.  The  bidders  are  impelled  by  self-interest  to  outbid 
their  competitors,  and  thus  the  limits  within  which  the  mar- 
ket price  must  fall  are  narrowly  fixed. 


34  EXCHANGE  IN  A  MARKET  [CH.  5 

Buyers  fix  If  things  already  brought  to  market  must  be  sold  at  any 
perishable  price  that  can  ke  secure(i,  the  buyers  may  be  said  to  fix  the 
goods  price.  This  does  not  mean  that  they  can  buy  it  for  any  sum 

that  they  wish,  but  it  means  that  when  each  one  is  trying  to 
get  it  as  cheap  as  possible,  their  bids  finally  determine  how 
much  it  will  sell  for.  In  such  cases,  therefore,  the  compe- 
tition is  for  the  moment  one-sided. 

If  a  part  of  the  supply  can  be  withdrawn  and  kept  without 
great  loss,  this  will  be  done  if  the  price  is  low.  Strawberries, 
fish,  and  meat  may  be  sold  Saturday  night  at  any  price  that 
will  secure  purchasers,  but  every  thing  that  can  be  kept  with 
little  or  no  depreciation  will  be  withheld  from  sale  for  a  time. 
It  may  even  be  of  advantage  to  the  seller  to  destroy  a  part 
of  the  supply,  when  the  increased  price  of  the  smaller 
amount  will  give  a  larger  total. 

3.  Where  two-sided  competition  exists,  the  bidding  goes 
on  until  a  price  is  reached  where  the  Ig&sJ  eager  seller 
and  the  least  eager  buyer  have  the  narrowest  possible  motive 
to  exchange.  As  the  market  ratio  varies  from  those  in 
the  minds  of  the  individuals  when  they  come  to  the  mar- 
ket, there  is  left  a  considerable  margin  to  some  and  a 
very  small  one  to  others.  This  difference  between  the  mar- 
ket value  and  the  ratio  of  exchange  at  which  any  given  in- 
dividual would  continue  to  exchange  for  the  good  may  be 
called  the  margin  of  advantage.  Moreover,  the  buyers  will 
have  a  margin  and  the  sellers  a  margin,  and  as  that  margin 
narrows  there  is  less  and  less  motive  to  continue  the  ex- 
change until,  finally,  the  margin  disappearing,  the  buyer  or 
seller,  withdrawing  from  the  market,  ceases  to  be  an  ex- 
changer, at  least  for  that  particular  part  of  the  goods. 

The  least  eager  buyer  and  the  least  eager  seller  may  be 
/  called  the  marginal  pair.  They  are  the  buyer  and  the  seller 
respectively  having  the  narrowest  margin  of  advantage. 
Their  outside  estimates  are  nearest  to  the  market  ratio.  If 
the  market  ratio  shifts  slightly  in  either  direction,  one  of 
them  will  drop  out  of  the  exchange.  It  is  evident  that  a  buyer 

V 


§11] 


BARTER   UNDER   SIMPLE  CONDITIONS 


35 


who  is  taking  ten  units  may  be  on  the  margin  with  reference 
to  the  tenth  unit,  and  yet  may  continue  to  be  one  of  the  most 


Market 


eager  buyers  to  secure  one  unit.  J  Thus,  the  marginal  buyer 
is  to  be  thought  of  as  that  person  who,(  logically  considered, 
is  the  least  eager,  or  on  the  margin,  with  reference  to  a 
particular  unit  of  supply,  however  eager  he  may  be  with 
reference  to  any  other  unit  of  supply.  It  would  be  well  to 
recall  here  the  discussion  of  the  nature  of  wants  and  the 
variation  in  the  intensity  of  demand. 

4.  Market  values  are  built  up  on  subjective  valuations. 
The  idea  of  market  values,  therefore,  is  that  of  the  want-grat- 
ifying  power  of  goods  as  expressed  in  terms  of  other  goods,  uaiesti 
where  there  are  various  buyers  and  sellers.  They  are  not  an 
average  of  the  subjective  valuations,  nor  are  they  made  up 
of  the  extremes.  They  correspond  closely  with  the  sub- 
jective estimates  of  two  of  the  exchangers.  The  other  parties 
to  the  exchange  are  wilHng  to  accept  the  market  ratio,  for 
it  offers  them  more  inducements  than  it  does  to  either  one  of 
the  marginal  pair. 


36  EXCHANGE   IN  A  MARKET  [CH.  5 


§  III.       PRICE  IN  A  MARKET 

one  price  in  1.  A  market  is  a  body  of  buyers  and  sellers  in  such  close 
a  market  business  relations  that  the  actual  price  conforms  closely  to 
the  -valuation  of  the  marginal  pair.  The  word  "price" 
which  we  have  used,  may  be  defined  as  value  expressed  in 
terms  of  some  commonly  exchanged  commodity.  The  term 
is  used  more  broadly  of  anything  given  in  exchange.  The 
very  terms  of  this  definition  imply  that  there  can  be  but  one 
price  in  a  market.  This  is  a  somewhat  abstract  but  a  useful 
economic  proposition.  Very  often  within  sound  of  each 
other's  voices  traders  are  paying  different  prices  for  a  good. 
On  the  occasion  of  a  break  in  the  stock-market,  excited 
traders  within  ten  feet  of  each  other  make  bids  that  differ 
by  thousands  of  dollars.  Retail  and  wholesale  merchants 
may  be  purchasing  goods  in  the  same  room  at  the  same  time 
at  very  different  prices.  But  within  a  group  of  buyers  and 
sellers  where  competition  is  approximately  complete,  price 
—is  fixed  with  some  degree  of  exactness.  The  more  nearly 
the  actual  conditions  approach  to  the  ideal  of  a  market,  the 
less  are  prices  fixed  by  higgling,  and  the  more  impersonal 
they  become,  the  buyers  and  sellers  being  compelled  to  adjust 
their  bids  to  the  needs  of  the  market,  and  not  being  able  to 
vary  them  greatly  one  way  or  the  other. 

The  earlier  2.  Markets  are  steadily  widening  through  the  improve- 
ment of  means  of  communication  and  transportation. 
The  earliest  markets  were  established  on  the  borders 
between  tribes,  villages  or  nations  as  a  common  ground 
where  strangers  met  to  trade.  At  such  markets  were  brought 
together  from  sparsely  settled  districts  a  comparatively 
large  number  of  merchants  and  customers.  Buyers  had  the 
opportunity  of  wide  selection  both  in  kind  and  quality,  and 
the  sellers  found  a  large  body  of  customers  gathered  at  one 
point.  Throughout  the  Middle  Ages  purchases  were  made  by 
the  more  prosperous  husbandmen  in  great  quantities  once  a 


§IH]  PRICE   IN  A  MARKET  37 

year  at  the  fairs  or  markets.  As  both  the  buyers  and  sellers 
came  from  widely  separated  places,  there  was,  in  most  re- 
spects, no  combination,  and  the  conditions  of  a  competitive 
market  were  present. 

The  number  of  buyers  and  sellers  that  can  constitute  a  The  growth 
single  market  is  limited  both  directly  and  indirectly  by  the  ofmarkets 
means  of  transportation.  A  dense  population  cannot  usually 
be  maintained  without  easy  means  of  transportation  to  bring 
in  a  large  supply  of  food,  and  to  carry  back  manufactured 
goods  great  distances.  The  remarkable  growth  in  the  means 
of  commerce  since  the  application  of  steam  to  water  traffic, 
and  the  invention  of  the  railroad,  have  made  it  possible  for 
goods  to  be  gathered  from  most  distant  points.  A  market 
implies  a  common  understanding  among  traders.  Modern 
means  of  communication  such  as  newspapers,  post-offices, 
telegraph  and  cable,  trade  bulletins,  commercial  travelers, 
the  consular  service,  and  many  forms  of  special  agencies, 
are  diffusing  information  widely.  As  a  result  of  these 
changes,  there  has  been  a  widening  of  the  village-market  to 
the  markets  of  the  province,  of  the  nation,  and  finally  of  the 
world.  While  a  part  of  every  one's  purchases  continues  to 
be  made  in  the  neighborhood,  a  greater  and  greater  portion 
of  the  total  business  is  done  by  traders  who  are  widely  sep- 
arated and  who  are  indeed  members  of  the  world  market. 
Various  articles  produced  in  the  same  locality  may  seek  dif- 
ferent markets.  The  market  for  wheat  may  be  in  Liverpool, 
while  that  for  fruit  and  eggs  is  in  the  village  near  the  farm- 
house. If  a  given  product  of  any  community  is  sold  in  dif- 
ferent markets,  the  net  prices  secured  must  be  very  nearly 
equal. 

3.     Normal  price  is  spoken  of  in  contrast  to  market  price  Theconcep- 
when  the  actual  market  price  results  from  exceptional  cir-  andmarket 
cumstances  and  probably  will  not  be  maintained.    The  term  price 
"normal  price,"  much  used  in  economic  discussion,  is  the 
price  which,  apart  from  exceptional  conditions,  is  expected  to 
prevail,  and  to  which  actual  prices  seem  constantly  striving 


38  EXCHANGE   IN  A  MARKET  [CH.  5 

to  adjust  themselves.  As  actual  prices  are  nearly  always 
either  more  or  less  than  so-called  normal  price,  and  only 
momentarily  ever  correspond  with  it,  the  term  "normal" 
would  appear  to  be  something  of  a  misnomer.  Moreover, 
as  the  circumstances  of  production  change,  this  normal  price 
itself  is  altered  so  that  what  is  normal  one  day  may  be  quite 
abnormal  the  next.  The  thought  of  "normal  price"  is  an 
abstract  one,  but  despite  the  inaptness  of  the  word  it  is  not 
without  some  practical  validity.  ^In  determining  whether  he 
/  shall  continue  to  produce  certain  goods,  the  business  man  is 
practically  guided  by  his  view  of  normal  price.  An  example 
of  departure  from  normal  price  as  above  defined,  is  found  in 
the  price  of  food  when  an  expected  ship  has  failed  to  ar- 
rive at  a  port  with  its  cargo  of  grain.  A  scarcity  amount- 
ing almost  to  famine  might  thus  exist  in  a  seaboard  city,  and 
the  market  price  would  rise ;  but  as  this  would  be  due  to  an 
accident  and  would  afford  a  larger  gain  than  usual  to  those 
who  happened  to  have  a  supply  of  grain,  men  would  say 
that  the  market  price  was  above  the  normal  price.  The 
arrival  of  the  expected  ship  would  cause  the  market  price 
to  return  to  the  normal. 

Review  of  In  review,  we  see  that  the  market  value  of  goods  grows  out 
menTSU~  of  the  different  personal  estimates  made  by  men.  Market 
value  itself  being  a  complex  and  difficult  problem,  it  can 
be  mastered  only  by  dividing  it.  First,  therefore,  must  be 
studied  the  more  general  and  obvious  motives  of  men,  the 
nature  of  wants  and  their  effects  on  man's  subjective  esti- 
mates. The  same  simple  motives  that  influence  the  subjective 
valuations  made  by  individual  men,  may  be  traced  to  the 
conditions  of  the  complicated  market.  It  is  their  workings 
that  are  seen  in  the  obscurest  problems  of  market  price. 


CHAPTER  6 
PSYCHIC   INCOME 

§  I.      INCOME   AS   A   FLOW   OF   GOODS 

1.  Satisfaction  and  gratification  being  only   temporary  Therecur- 
conditions,  economic  wants  appear  in  more  or  less  regularly  ^J^* 
recurring  series.    Impressions  are  short  lived,  sensations  are 
temporary,  wants  that  have  been  satisfied  recur.  Wants  recur 

for  the  same  reason  that  they  first  arose.  No  impression  on 
the  nerves  or  on  the  senses  is  lasting.  Man's  senses  were  de- 
veloped for  the  purpose  of  bringing  him  into  relation  with 
the  outer  world,  of  enabling  him  to  survive  in  his  struggle 
with  the  forces  of  nature.  So,  when  a  good  has  been  enjoyed, 
the  utility  to  that  person  of  that  thing  or  service  for  that  par- 
ticular moment,  falls,  it  may  be  even  to  zero.  To  keep  wants 
satisfied  is  impossible;  we  cannot  do  next  year's  reading  or 
next  week's  eating  now ;  we  cannot  live  the  life  of  to-morrow. 
The  best  results  in  reading  or  eating  come  from  taking  the 
right  amount  day  by  day.  But  it  is  a  need  in  the  life  of  men 
that  wants  should  recur  after  a  time,  otherwise  there  would 
be  no  motive  for  action. 

2.  The  economic  ideal  is  that  this  series  of  recurring  series  of 
wants  should  be  met  by  a  corresponding  series  of  goods.    It  wants  and 

.  .  series  of 

is  evident  that  if  a  series  or  succession  01  goods  varies,  at  go0ds 
different  times,  moments,  and  conditions,  in  its  power  to  grat- 
ify wants,  the  closer  the  correspondence  between  the  two 
series,  that  of  wants  and  that  of  goods,  the  greater  will  be 
the  total  of  gratification.  We  may  liken  man's  life  to  a 
journey  in  which  the  supplies  of  food  are  gotten  at  the  sta- 

39 


40 


PSYCHIC   INCOME 


ICH.  6 


tions.  If  any  one  of  these  supplies  fails,  the  traveler  suffers 
the  pangs  of  hunger,  and  if  two  or  three  supplies  are  at  one 
point,  they  do  not  serve  the  needs  of  man  so  well  as  if  dis- 
tributed along  the  way.  This  constant  inflow  of  goods  is  one 
of  the  fundamental  needs  of  life.  The  savage  dimly  under- 
stands this  need.  Even  the  birds  and  the  beasts  adjust  their 
lives  to  it  either  by  travel  or  by  toil.  The  spring  and  autumn 
migrations  to  new  feeding  grounds  are  the  attempts  of  the 
bird  to  gratify  this  series  of  wants  as  they  arise.  The  ant, 
the  bee,  and  the  squirrel  anticipate,  and  work  to  fill  their 
storehouses  against  the  days  of  need. 

3.  Objective  income  consists  of  the  additional  sums  of 
goods  acquired  by  individuals  or  by  society  during  the  in- 
come period.  The  term  national  or  social  income  may  be 
contrasted  with  individual  or  private  income  in  the  objective 
sense.  The  nature  of  the  acquisition  of  objective  incomes 
may,  in  some  cases,  be  different  if  viewed  from  the  social  and 
individual  standpoints.  Society,  as  a  whole,  may  be  said  to 
acquire  income  only  when  goods  are  produced;  individuals 
may  acquire  income  by  gift,  bequest,  theft,  or  other  modes  of 
transfer  from  other  individuals.  In  many  cases  the  two 
kinds  of  income,  however,  agree,  the  objective  income  of  so- 
ciety being  the  algebraic  sum  of  the  goods  acquired  or  parted 
with  by  all  the  individuals. 

We  should  not  understand  that  either  social  or  private  ob- 
jective incomes  include  only  material  goods,  for  many  utili- 
ties and  labor  services  that  never  take  on  a  material  or  money 
expression  are  included  in  either  case.  Indeed,  we  are  close 
here  to  the  conception  of  psychic  income  which  is  to  be  de- 
veloped more  fully. 

Income  of  money  is  not  often  the  same  as  income  of  things. 
Usually  many  of  these  subtler  utilities  are  overlooked  and 
omitted  from  the  recognized  money  income.  In  this  day  the 
use  of  money  is  so  common  that  we  are  sometimes  led  to  ig- 
nore the  value  of  things  to  which  the  money  expression  is 
not  given.  The  money  income  is  merely  the  money  expres- 


§1]  INCOME  AS  A   FLOW  OF   GOODS  41 

sion  of  the  value  of  currently  acquired  goods,  and  it  is  the 
only  medium  through  which  such  varied  sources  of  gratifica- 
tion can  be  compared. 

4.  Income  in  the  logical  sense  must  ~be  a  net  addition,  but  cross  and 
the  term  gross  income  is  not  without  popular  and  practical  netincome 
meaning.    Gross  income  is  sometimes  spoken  of  in  the  sense 

of  total  receipts,  as  the  total  of  goods  secured ;  net  income  is 
the  remainder  after  deducting  expenditures  and  after  replac- 
ing the  goods  employed  to  secure  the  income.  In  order  to 
produce  some  goods  technically,  men  make  use  of  other 
goods.  While  they  are  storing  up  a  supply  of  wood  or  coal 
it  may  be  looked  upon  as  the  income,  but  they  may  burn  it 
to  help  grow  hothouse  plants.  While  they  gather  flowers 
with  one  hand,  they  destroy  fuel  with  the  other.  Only  the 
net  increase  in  value  can  be  accounted  income  in  the  second 
period.  The  goods  that  come  into  a  man's  possession  in  any 
period  are  of  many  sorts :  to  get  some  he  has  destroyed  many 
previously  existing  goods;  while  to  get  others  he  has  not 
needed  to  use  up  the  accumulations  of  the  past  or  to  mort- 
gage the  future.  The  one  kind  is  gross,  the  other  net  income. 

5.  An  income  of  consumption  goods  is  a  part  of  wealth,  wealth  and 
but  not  the  whole  of  it.    The  consumption  goods,  the  "pres-  l 

ent  goods"  at  the  moment  available,  are  the  essential  part  of 
wealth  for  the  moment's  enjoyment.  The  only  essential  and 
immediate  conditions  of  a  series  of  gratifications  is  a  regular 
series  of  consumption  goods.  But  many  things  existing 
which  could  be  used  to  secure  a  gratification  are  not  in  fact 
treated  as  consumption  goods.  A  crop  of  corn  is  not  all  in- 
come. In  a  time  of  famine  it  could  be  used,  but  seed-corn 
was  saved  from  last  year,  and  some  must  be  kept  for  next 
year.  This  is  a  part  of  wealth,  but  not  of  "present  goods" 
as  we  understand  the  term. 

Further,  in  the  economic  world  there  is  much  wealth  that   some  goods 
never  can  gratify  any  want  directly ;  many  forms  of  wealth  J^J"1 
never  can  be  consumption  goods.    It  is  true  that  everything  enjoyable 
called  wealth  is  expected  to  contribute  sooner  or  later  in  some  *°°^ 


42  PSYCHIC  INCOME  [CH.  6 

way  to  the  sum  of  gratifications.  It  is  for  that  reason  it  is 
called  wealth.  It  is,  however,  a  mere  figure  of  speech  to  say 
indirect  want-gratifiers  become  want-gratifying  goods.  For 
example,  the  engine  transporting  a  load  of  coal  is  indirectly 
gratifying  wants;  if  it  is  transporting  a  train-load  of  pas- 
sengers, the  gratification  is  direct.  A  machine  making  cloth 
for  next  year  is  gratifying  wants  only  in  a  metaphorical 
sense.  A  field  used  to  produce  food  is  not  a  direct  want- 
gratifier  until  it  is  transformed  into  a  residence  site,  a  play- 
ground, or  a  tennis-court. 

It  is  necessary  therefore  to  recognize  the  distinction  be- 
tween present  and  future  incomes.  The  value  of  the  mass  of 
wealth  in  possession  and  yielding  income,  rests  in  large  part 
upon  its  power  of  contributing  to  income  in  some  future 
period.  Thus,  any  durable  good  may  be  looked  upon  as  em- 
bodying a  series  of  incomes  ranging  from  present  to  future 
in  varying  degrees.  This  will  be  fully  considered  under  the 
subject  of  capital. 

income  from  6.  Incomes  are  called  funded  or  unfunded  according  to 
fromubof  ^e  sources  from  which  they  are  derived.  Funded  income 
arises  from  the  possession  of  wealth  or  of  claims  on  wealth, 
such  as  lands,  railroad  stocks,  government  bonds,  etc.  The  in- 
come is  ' '  funded ' '  because  it  corresponds  to  an  abiding  fund 
of  wealth.  The  income  arising  from  current  labor  is  un- 
funded, because  there  is  no  permanent  fund  of  accumulated 
wealth  corresponding  to  it. 

The  idea  of  regularity  connected  with  funded  income  is 
not  essential  to  the  idea  of  income  in  general,  i.e.,  we  cannot 
refuse  to  call  a  thing  income  because  it  occurs  only  this  year. 
If  it  is  part  of  the  sum  of  goods  that  flows  in,  that  is  newly 
available  for  the  man's  use,  it  is  income.  But  funded  in- 
come is  the  more  abiding,  for  income  from  wages  stops  when 
the  man  dies  or  fails  to  perform  his  work,  while  the  income 
from  wealth  continues  after  he  ceases  to  be  active.  Thus, 
families  with  equal  incomes  may  differ  greatly  in  wealth, 
the  one  depending  entirely  on  salaries,  the  other  on  rents. 


§11]  INCOME  AS  A  SERIES  OF   GRATIFICATIONS  43 


§  II.       INCOME   AS   A   SERIES   OF    GRATIFICATIONS 

1.     The  value  of  consumption  goods  is  derived  from  the  Gratmca- 
pleasurable  psychic  impressions  which  they  aid  to  produce,  ^^hiT 
and  these  psychic  effects  constitute  the  psychic  income.    The  income 
objective  income  is  sometimes  called  the  "real"  income,  but 
certainly    it    is    not    income    in    the    most    essential    sense. 
Things  outside  of  men  cannot  be  feelings,  they  can  only  call 
out  or  occasion  feeling,  and  it  is  the  attainment  of  pleasurable 
conditions  in  mind  or  soul  that  is  the  aim  of  all  economic  ac- 
tivity.   Material  income  and  immaterial  income  are  both  re-1 
lated  to  and  reducible  to  psychic  income.     Some  portions  at 
least  of  the  objective  incomes  of  goods  are  continually  by 
use  becoming  subjective  incomes  of  enjoyment.    Men  talk  of 
material  income  as  consisting  of  bushels  of  wheat,  bead  of^^ 
cattle,  etc.,  and  of  immaterial  income  as  the  uses  that  dura)>l'e 
goods  yield  directly  or  that  men  perform  for  each  other,  e.g., 
those  of  the  singer,  physician,  teacher,  judge— all  services 
that  do  not  take  on  material  form.    There  was  a  long-stand- 
ing dispute  in  economic  literature  regarding  the  difference 
between  productive   and   unproductive   labor.      Productive 
labor  was  said  to  be  that  which  embodied  itself  in  abid- 
ing material  form.     The  distinction  led  to  some  peculiar 
puzzles  and  paradoxes.     The  bartender  mixing  drinks,  adds 
to  the  value  of  those  ingredients ;  in  a  minute  that  value  is 
dissipated.    According  to  the  distinction  in  question,  he  is  a 
productive  laborer  because  his  services  are  embodied  in  ma- 
terial form,  whereas  the  lecturer  is  regarded  as  an  unpro- 
ductive laborer  because  the  results  of  his  labor  are  not  em- 
bodied in  material  form.    But  whether  or  not  the  service  has  AU  sources 
for  a  moment  embodied  itself  in  material  form  is  of  no  essen-  °*r™°™ 
tial  economic  import.    The  presence  of  the  waiter  is  as  essen-  ductive 
tial  to  the  well-served  dinner  as  are  the  polished  silver  and 
china,  or  as  the  well-cooked  food.   The  distinction  in  question 
is  not  now  made  by  economists,  all  labor  that  contributes  to 


44 


PSYCHIC   INCOME 


[CH.  6 


All  wealth 
is  logically 
related  to 
psychic 
income 


value  being  regarded  as  productive.  But  a  similar  distinc- 
tion is  inconsistently  preserved  by  many  writers  in  the  case 
of  material  things.  A  building  used  as  a  factory  is  called 
productive,  but  used  by  the  owner  as  a  dwelling  it  is  called 
unproductive  because  the  service  it  renders  does  not  appear 
in  material  form.  But  the  use  of  the  house,  or  that  of  land 
for  a  school  ground  or  campus,  secures  a  certain  gratifica- 
tion, an  immaterial  good.  Consistency  requires  that  the 
services  of  men  and  the  use  of  material  things  be  judged  by 
their  psychic  results,  the  question  whether  the  service  takes 
on  a  material  or  an  immaterial  form  being  disregarded. 
,  2.  Only  those  things  and  actions  that  are  in  some  causal 
relation  to  gratifications  can  have  value  to  man.  This  propo- 
sition of  theory  is  demonstrated  every  hour  in  practical  life. 
The  business  man  always  is  trying  to  trace  a  causal  relation 
between  things  that  do  not  and  cannot  themselves  directly 
satisfy  wants,  and  things  that  do.  The  vineyard  has  no 
value  to  Tantalus,  unable  to  reach  its  fruit.  A  captive, 
chained  to  a  rock,  attaches  value  only  to  the  things  within 
his  reach.  Men  living  in  savagery  and  ignorance  starve 
amid  the  possibilities  of  plenty.  Chained  by  their  ignorance 
and  improvidence  to  a  little  spot  of  earth,  they  do  not  see 
clearly,  either  in  time  or  space,  the  economic  relations  about 
them. 

3.  Man's  foresight  and  knowledge  enable  him  to  think  of 
many  periods  at  once,  and  thus  his  felt  dependence  on  goods 
extends  over  a  series  of  future  productive  agents.  In  order 
to  simplify  the  problem,  we  have  spoken  of  the  economic  man 
as  living  only  in  and  for  the  moment.  If  he  had  no  more 
knowledge,  memory,  or  imagination  than  is  necessary  to  com- 
pare goods  here,  only  present  goods  could  have  value  to  him. 
Even  the  higher  animals,  and  much  more  the  savages,  rise 
above  that  level  of  improvidence.  With  increased  intelli- 
gence the  economic  life  of  man  expands,  and  he  attaches  im- 
portance to  things  which  at  the  present  moment  have  not, 
and  cannot  have,  the  slightest  influence  on  his  immediate 


§11]  INCOME  AS  A   SERIES  OF  GRATIFICATIONS  45 

gratification.  The  extension  of  man's  view  works  a  momen- 
tous change  in  his  economic  estimates.  Of  the  thousands  of 
forms  of  matter  in  the  world,  only  a  comparatively  few  ever 
will  make  an  immediate  gratifying  impression  on  man's 
senses.  But  many  of  them  are  so  connected  in  his  thought 
/  by  chains  of  association  with  pleasures  or  uses,  that  almost 
instinctively  and  most  intensely  he  attaches  an  importance 
to  them.  In  most  cases  it  would  require  close  thought  to  see 
that  the  service  attributed  directly  to  them  was  but  a  re- 
flection of  that  performed  by  some  other  good.  Thus,  more 
and  more,  the  estimates  placed  by  men  on  goods  come  to  de- 
pend on  knowledge  and  foresight,  and  not  on  immediate  im- 
pressions and  feelings. 

4.  Things  are  causally  related  in  varying  degrees  to  the*  Goods 
psychic  income,  and  have  value  only  as  their  relation  is]™^**1 
known  and  felt.  The  explanation  of  value  is  not  completeN  grees  to 
till  value  has  been  traced  back  to  its  source  in  gratification/  JJJ^0 
Often  the  complex  nature  of  the  problem  is  ignored.  If  one 
discusses  the  trading  of  a  bushel  of  grain,  to  be  used  by  a 
hungry  man  for  food,  for  a  sheep  to  be  kept  for  breeding,  or 
for  wool  to  be  made  into  cloth  next  year,  he  may  overlook  the 
difference  in  the  grade  of  wants  compared.  In  this  case,  a 
gratification  of  the  present  moment  is  compared  with  a 
gratification  of  a  very  different  kind  at  a  future  time.  The 
problem  involved  is  complex  because  of  differences  in  time, 
in  place,  and  in  the  nature  of  the  want-gratifiers.  The  student 
should  endeavor  to  reduce  the  problem  of  value  to  its  sim- 
plest form  by  considering  first  the  exchange,  at  the  present 
moment,  of  immediately  enjoyable  goods.  The  logical  start- 
ing-point in  the  theory  of  value  is  in  those  goods  that  are  in 
closest  touch  with  feeling,  and  on  this  basis  may  be  built  up 
an  explanation  of  values  in  which  reason  and  forethought 
have  a  greater  part.  __  Starting  from  the  proposition  that 
psychic  income  is  the  foundation  of  all  values,  we  shall  go 
on,  however,  to  trace  causes  that  give  value  to  all  the  physi- 
cal agents,  and  to  the  most  indirect  of  want-gratifiers. 


DIVISION   B— WEALTH  AND   RENT 

CHAPTER  7 
WEALTH  AND  ITS  INDIRECT  USES 

§  I.      THE  GRADES  OF  RELATION  OF  INDIRECT  GOODS  TO 
GRATIFICATION 

1.  Goods  may  be  ranked  according  to  their  technical  re- 
lation to  wants.     The  technical  rank  of  goods   (sometimes 
spoken  of  as  the  degree  of  roundaboutness  of  the  process) 
signifies  the  number  of  steps  or  processes  that  intervene  be- 
tween the  agent  used  and  the  desired  form.    If  one  wishing 
the  hickory-nut  hanging  above  his  head  must  first  pick  up 
a  stick  to  throw  at  it,  the  nut  is  removed  one  step  from  de- 
sire.   But  even  among  savages  the  processes  are  much  more 
complicated.     The  Indian  with  a  crude  knife  fashions  his 
bow  and  arrow,  fastens  the  flint  and  cord  which  represent 
still  other  processes  of  industry,  and  shoots  the  bird  which 
satisfies  his  hunger.    In  modern  conditions  the  relations  are 
vastly  more  complicated ;  only  at  the  end  of  a  long  series  do 
men  arrive  at  the  thing  which  gratifies  their  wants. 

2.  Goods  may  be  ranked  by  their  relation  to  wants  in 
time.     The  relation  in  respect  to  time  is  measured  by  the 
period  that  must  elapse  before  the  utility  of  an  agent  results 
in,  is  converted  into,  gratification.     No  agent  or  influence 
intervening,  a  thing  may  yet  be  removed  a  long  way  from 

46 


§11  INDIRECT   GOODS  AND  GRATIFICATION  47 

gratification.  A  tree  may  not  be  fitted  to  bear  fruit  for  ten 
years  to  come.  Meantime,  there  are  many  other  possible  uses 
for  the  tree :  it  may  be  used  for  fuel,  or  to  make  a  canoe  with 
which  to  catch  fish,  or  to  follow  some  other  indirect  method 
of  production.  Evidently  the  technical  and  time  relations  of 
goods  are  very  different.  The  number  of  steps  has  no  neces-  , 
sary  relation  to  the  time.  A  number  of  technical  steps  may 
be  taken  in  half  an  hour,  or  a  process  of  a  single  technical 
step  may  last  a  year.  In  the  mechanic  arts  the  technical  re- 
lations are  of  primary  significance,  but  in  economics  the 
time  relations  are  mainly  to  be  considered. 

3.  Economic  goods  may  be  classified  as  immediately  en- 
joyable goods  and  durable  agents.  Enjoyable  goods  are 
goods  in  a  final  form,  producing  gratification  or  just  ready 
to  give  gratification  the  next  moment,  as  the  cool  draft  of 
air  made  by  a  fan  on  a  hot  day,  the  cup  of  coffee  steaming 
on  the  table. 

Many  goods  of  just  the  same  form  as  the  foregoing  may  not  Enjoyable 
be  affording  current  gratification   (except  that  afforded  by  j 
thrift  and  forethought) ,  but  are  kept  because  later  they  will  agents 
gratify  a  more  intense  want  or  gratify  a  want  better.    Apples 
and  potatoes  are  kept  in  a  cellar  so  that  their  use  is  dis- 
tributed throughout  the  winter ;  cider  and  wine  are  kept  till 
they  get  a  quality  that  appeals  more  to  the  palate.     Coal, 
wood,  and  stocks  of  goods,  are  thus  kept  in  the  form  of  en- 
joyable goods,  destined  to  be  physically  destroyed  when  at 
length  they  yield  a  gratification.     Evidently  they  must  be 
storing  up  meantime  a  certain  additional  utility,  for  other- 
wise there  would  be  no  reason  why  they  should  be  kept  for 
the  future.     Such  goods  as  these  are  sometimes  called  un- 
ripened  consumption  goods,  but  until  ripened  they  bear  in 
part  the  character  of  durable  agents. 

Abiding  sources  of  economic  enjoyments  are  called  durable 
agents.  The  inhabited  house  is  a  source  of  continued  grati- 
fication in  each  moment 's  shelter  it  affords ;  but,  further,  it  is 
the  durable  source  of  a  series  of  future  uses,  as  yet  un- 


48 


WEALTH   AND  ITS  INDIRECT   USES 


[CH.  7 


Degrees  of 

durableness 


ripened.  The  hammer,  the  hoe,  the  tree,  the  field  may  all 
be  considered  as  agents  to  secure  consumption  goods.  Some 
of  these  are  but  one  step  removed  from  direct  gratification, 
as  the  hoe  helping  the  gardener  to  get  food  for  his  own  use. 
Other  agents  are  bound  by  many  technical  links  to  the  ulti- 
mate gratification. 

4.  This  classification  of  goods  is  abstract,  in  that  it  is  a 
classification,  not  of  concrete  goods,  but  of  qualities  shared 
in  some  degree  by  nearly  all  goods.  Most  goods  unite  in 
some  degree  both  characters,  but  in  varying  measure.  This 
is,  therefore,  a  continuity  classification,  the  varying  classes 
of  goods  grading  from  those  whose  durableness  is  zero  (just 
at  the  moment  of  consumption)  to  those  most  durable,  which 
yield  an  endless  series  of  uses  or  products.  Yet  the  classifica- 
tion is  practical,  corresponding  as  it  does  with  thoughts 
which  men  have  in  the  use  of  goods.  By  repairs  and  other 
methods  goods  become,  and  are  looked  upon  as,  durable 
sources  of  a  series  of  uses. 

It  is  to  be  noted  further  that  the  enjoyable  goods  pass 
over  into  psychic  income,  that  is,  they  are  the  stream  of 
objective  utilities  that  is  each  moment  detaching  itself  as 
income  from  the  great  mass  of  wealth.  The  durable  goods 
are  those  utilities  which  for  the  time  remain,  not  yet  ri- 
pened or  ready  to  be  converted  into  psychic  income. 


Income  as 
affected  by 
climatic 
conditions 


§  H.      CONDITIONS   OF   ECONOMIC   WEALTH 

1.  The  bounty  and  variety  of  the  natural  supply  of  in- 
direct goods  in  the  material  world  are  the  prime  conditions 
of  a  bountiful  income  to  society.  The  effect  of  climate  on  the 
supply  of  goods  available  for  man  is  complex.  Climate  is 
itself  a  direct  source  of  gratification.  As  temperature  must 
be  adjusted  to  man's  need,  climate  satisfies  wants  directly. 
Health,  energy,  the  beauty  of  noonday  woods  and  of  sunlit 
clouds  are  conditioned  on  the  favor  of  nature.  Climate  af- 
fects, further,  the  supply  of  material  economic  goods.  All 


$11]  CONDITIONS  OF  ECONOMIC  WEALTH  49 

the  earlier  civilizations  arose  in  warmer  countries.  But, 
after  man  had  gained  a  certain  mastery  over  the  obstacles  of 
nature,  he  was  able  to  soften  the  harsher  features  of  climate, 
and  with  better  shelter  and  clothing,  with  better  stocks  of 
winter  food  and  fuel,  the  more  favorable  features  of  the 
temperate  zone  could  be  utilized.  So  civilization  moved 
northward  from  Egypt  and  India  to  Greece  and  Rome,  to 
northern  Europe  and  America. 

Soil    conditions    for    vegetable    life    determine    first    the  By  natural 
amount  and  kind  of  animal  life.    Animal  life  from  one  point  resource8 
of  view  is  a  parasite,  living  on  the  vegetable ;  it  is  only  the 
vegetable  that  has  power  to  assimilate  most  inorganic  com- 
pounds.   Water  being  a  need  of  plant  life,  the  amount  of 
rainfall  is  one  of  the  most  important  conditions  of  industry. 
Man,  therefore,  depends  on  the  resources  of  the  soil  directly 
or  indirectly;  a  fertile  soil  furnishes  him  either  directly  a 
supply  of  vegetable  food,  or  indirectly  a  supply  of  animal 
food. 

Natural  supplies  of  metals,  of  coal,  and  of  timber  are  im- 
portant consumption  goods,  but  they  are  also  indirectly  the 
condition  for  a  vast  variety  of  other  goods.  The  industry 
that  could  exist  without  iron,  copper,  and  coal  would  be  of 
a  very  low  grade. 

The  variety  of  flora  and  fauna,  and  their  fitness  for  man 's 
needs,  largely  condition  the  possible  production.  If,  in  the 
course  of  evolution,  it  had  chanced  that  wheat  and  corn,  the 
horse  and  the  cow,  had  been  crowded  out  in  the  struggle  for 
existence,  we  should  have  had  a  very  different  civilization. 
The  possibilities  of  civilization  in  Peru,  and  those  of  all  the 
Indians  on  the  American  continent,  were  limited  for  lack  of 
domestic  animals.  Animals  that  are  fit  for  domestication  are 
a  necessary  intermediate  agent  by  aid  of  which  man  can  ap- 
propriate and  turn  to  his  use  the  fertile  qualities  of  the  soil. 

Not  content  with  the  material  world  about  him,  even  when 
it  is  at  its  best,  man  alters  it  in  many  ways.  He  enriches  the 
soil,  improves  the  varieties  of  animals,  he  even  in  some 

4 


50 


WEALTH  AND  ITS  INDIRECT   USES 


[CH.  7 


slight  degree  affects  the  climate,  and  by  the  use  of  a  multi- 
tude of  artificial  bits  of  matter  called  tools,  works  profound 
changes  in  the  world  in  which  he  lives. 

2.  A  large  part  of  the  utility  of  goods  is  conditioned  on 
motion  and  energy.     It  has  been  said  that  man's  power  in 
production  is  limited  to  moving  things.    The  outer  world  is 
to  man  the  sole  source  of  motive  forces.    He  can  bring  things 
together  and  they  produce  the  result.     Further,  it  may  be 
said  that  nearly  every  kind  of  utility  is  conditioned  on  mo- 
tion.   It  is  man's  aim  to  secure  a  constant  inflow  of  goods. 
To  secure  this  either  he  must  move  to  get  the  goods,  or  he 
must  cause  goods  to  move  toward  him. 

The  law  of  " conservation  of  energy"  helps  to  explain 
economic  action ;  the  supply  of  energy  in  the  universe  cannot 
be  increased  or  diminished,  but  may  take  on  new  forms.  So 
a  limited  supply  in  man 's  control  may  take  on  various  forms 
and  so  have  different  effects  on  gratifications.  One  and  the 
same  source  of  energy  may  be  converted  into  the  different 
forms  of  heat,  light,  motion,  electricity,  etc.  But  there  must 
be  some  source.  Man's  desire  is  directed  to  getting  force 
at  the  right  place  and  in  the  right  degree.  If  li^ht  or  heat 
is  too  intense,  it  causes  pain;  the  glare  of  the  stin  blinds 
instead  of  giving  keener  vision.  A  moderate  force  applied 
to  any  of  the  senses  gives  the  maximum  clearness  or  pleasure. 
Man  is  constantly  endeavoring  to  secure  forces  from  the 
outer  world  and  to  adjust  motion  so  that  it  will  directly  or 
indirectly  best  serve  his  purposes. 

3.  Among  the  main  sources  of  power  used  by  men  are 
food,  domestic  animals,  and  fuel.    In  eating  food  man  stores 
up  force  in  his  own  body.    When  he  draws  the  bow  he  puts 
force  into  it  to  lie  latent  until  liberated  at  the  right  moment. 
There  must  be  a  source  of  energy  likewise  that  mental  action 
may  go  on,  and  the  power  of  sunbeams,  stored  for  a  time  in 
food,  is  liberated  in  the  processes  of  thought. 

This  first  natural  mode  of  liberating  energy  within  their 
own  bodies  does  not  satisfy  the  growing  needs  and  aims  of 


§11]  CONDITIONS  OF  ECONOMIC  WEALTH  51 

men.  Such  a  mode  is  "labor,"  which  becomes  at  times  pain- 
ful and  distasteful.  In  the  earliest  societies  known,  some 
sorts  of  domestic  animals  are  found  supplementing  man's 
efforts  and  acting  upon  the  material  world  to  alter  it  for 
man.  The  dog  joining  in  the  chase  guards  his  master's 
safety,  and  helps  to  bear  his  burdens.  The  draft-beast  in  the 
field  turns  the  heavy  soil,  and  aids  in  the  final  harvest.  The 
trained  elephant  does  the  work  of  twenty  men  piling  logs, 
loading  ships,  or  carrying  burdens. 

Man  further  increases  his  control  over  the  material  world 
by  making  other  men  do  his  bidding.  Domestic  slavery, 
where  wife  or  child  serves  the  father  of  the  family,  or  chattel 
slavery,  where  the  vanquished  toils  for  the  victor,  are  all 
but  universal  in  early  communities.  Such  a  method  of  in- 
creasing one's  control  over  the  forces  of  the  world  requires 
only  superior  strength,  no  special  intelligence  in  mechanics, 
and  is  thus  one  of  the  first  crude  devices  in  a  primitive  civili- 
zation. 

Fuel  has  been,  up  to  the  present  time,  perhaps  the  most 
important  source  of  energy.  Fire  in  the  hands  of  savage 
man  gave  him  dominion  over  the  forests  and  over  the  metals. 
In  this  age  of  steam  the  liberation  of  the  energy  of  the  sun, 
stored  up  in  coal  in  ages  past,  is  still  the  indispensable  con- 
dition of  our  developed  industry. 

4.     The  greatest  and  most  exhaustless  reservoirs  of  power  By  the 
for  man's  use  are  in  wind  and  water.    While  the  supply  of  enersyin 

wind  and 

fuel  is  being  used  at  a  progressive  rate  and  will  soon  ap-  flowing 
proach  exhaustion,  there  are  elsewhere  exhaustless  stores  of  water 
energy  awaiting  man's  command.    To  make  use  of  the  wind 
for   sailing    a    boat,    only   the    simplest   arrangements    are 
needed;   a  windmill  fixed  at  one  place  requires  more  in- 
genuity and  machinery.    The  energy  of  the  wind  is  derived 
from  the  sun  and  will  last  until  the  sun  loses  its  heat.     If 
some  means  can  be  found  for  equalizing  the  flow  and  for  stor- 
ing the  power  of  the  wind,  it  may  yet  become  a  great  agency 
of  industry.    The  force  of  falling  water,  long  used  in  a  petty 


52 


WEALTH  AND  ITS  INDIRECT  USES 


[CH.  7 


way  by  the  old  water-mills,  is  just  beginning  to  be  employed 
on  a  large  scale  at  such  points  as  Niagara.  Where  fuel  is 
high,  as  on  the  Pacific  coast,  wave  motors  have  been  success- 
fully used  in  a  small  way,  but  wave  motion  is  too  irregular 
to  serve  well  the  needs  for  power.  But  the  constant  motion 
of  the  tides  offers,  at  some  favored  points,  a  source  of  power 
that  will  remain  as  long  as  the  earth  revolves  upon  its  axis. 

5.  Man  studies  and  compares  the  durable  goods  that  give 
him  command  over  enjoyable  goods,  and  attaches  value  to 
them.  Thus  energy  is  found  dissipating  itself  throughout 
the  world  in  ways  useless  to  man,  and  in  places  where  it  can- 
not serve  his*  purposes.  As  man  grows  in  power  of  control 
over  nature,  he  seeks  to  apply  these  forces  in  forms  and  at 
places  he  has  selected.  If  he  can  arm  himself  with  the  ener- 
gies of  mine  and  torrent,  he  can  react  with  giant  strength  on 
the  material  world.  He  ceases  to  accept  passively  its  condi- 
tions, and  to  live  on  its  grudging  gifts ;  he  becomes  its  fash- 
ioner, in  a  sense  its  creator.  His  intelligence  and  his  wants 
are  most  important  factors  determining  what  the  form  of  the 
physical  world  about  him  shall  be. 

But  all  the  efforts  of  men  in  the  most  developed  economy 
cannot  make  to  disappear  the  differences  in  the  quality  of 
goods  and  agents.  Desirable  goods  to  consume  are  limited 
in  quantity,  and  they  vary  in  quality ;  hence  they  have  value 
and  some  higher  than  others.  Likewise,  durable  material 
agents  and  sources  of  power  are  limited  in  number  and  vary 
in  convenience  of  location  and  efficiency.  As  men  seek  to 
gratify  their  desires,  they  attach  importance  to  these  agents 
of  power.  Each  is  valued  for  its  service  or  its  series  of  ser- 
vices. When  anything  is  seen  to  contain  a  series  of  uses,  it 
becomes  a  rent-bearer,  and  the  economic  problem  of  rent 
arises,  one  step  more  complex  than  the  problem  of  valuing 
simple  consumption  goods. 


CHAPTER  8 
THE  RENTING  CONTRACT" 

§  I.       NATURE   AND    DEFINITION    OF    RENT 

1.  The  temporary  use  of  materials  and  power  and  their  Temporary 
sources   is   necessary   to   bring  most   enjoyable  goods  into  useand 
being.    Indirect  goods  have  value  solely  because  they  help  to  possession 
get  direct  goods.     The  apple-tree  is  valued  because  it  bears  ofa*ents 
fruit,  and  the  orchard  because  the  trees  give  promise  of 
yielding  a  succession  of  crops  for  years  to  come.    There  are 

thus  two  problems  of  value  in  connection  with  durable 
goods:  that  of  the  value  of  a  temporary  use  for  a  brief 
period,  as  for  a  year ;  and  that  of  the  value  of  a  thing  itself, 
the  use-bearer,  for  a  long  series  of  years  or  in  perpetuity. 
To  explain  what  fixes  the  value  of  the  temporary  use  is  the 
problem  of  rent;  to  explain  what  determines  the  value  of 
long-continued  use  or  of  permanent  control  and  ownership 
of  a  use-bearer  is  the  problem  of  capitalization. 

2.  The  term  rent  is  used  in  a  number  of  senses,  which  origin  of  the 
must  be  carefully  distinguished.     The  original  meaning  of  termrent 
rent  was  any  regular  income  or  revenue  arising  from  wealth. 

The  word  comes  from  the  low  Latin  rent  a  from  renda,  in 
turn  from  redditus,  that  which  is  given,  yielded  or  given 
back,  or  rendita,  that  which  is  given  or  returned.  The 
French  rendre  (English  render),  to  give  or  return  that 
which  belongs  to  one,  is  used  very  early.  Chaucer  used 
"  rente  "  as  an  income.  "  Cattle  had  he  enough  and  rente," 
cattle  probably  meaning  property  (chattels),  and  rente  in- 
come. Rental  is  a  collective  term  for  a  number  of  rents. 

53 


54  THE  RENTING  CONTRACT  [CH.  8 

The  total  yield  of  an  estate  was  called  its  rental  or  rent-roll, 
and  a  list  of  the  various  sources  of  income,  including  all 
payments  from  tenants  in  money,  produce  or  services,  consti- 
tuted its  rental. 

3.  The  popular  meaning  of  rent  is  the  amount  paid  for 
the  use  of  material  things  which  must  be  returned  to  the 
owners  after  the  time  of  use  agreed  upon.  We  speak  of  the 
rent  of  a  house,  boat,  etc.,  using  the  word  as  a  synonym  for 
hire.  In  the  European  languages  the  word  is  used  more  fre- 
quently in  that  sense.  In  the  French  la  rente  means  the 
income  from  any  kind  of  property;  but  corporate  se- 
curities and  national  bonds  came  particularly  to  be  called 
les  rentes,  because  they  are  a  form  of  investment  yielding 
a  permanent  income.  The  one  who  has  a  perpetual  income 
from  bonds  or  rents  is  called  a  rentier.  In  German  the  term 
Rente  is  used  more  broadly  than  in  English,  as  an  income 
of  any  sort,  Grundrente  meaning  the  rent  of  land,  and  Capi- 
talrente  the  income  usually  in  England  called  interest. 

A  restricted  meaning  has  long  been  applied  by  economists 
to  the  word :  the  income  yielded  by  lands,  etc.  This  was  put 
in  contrast  with  interest  for  money  and  capital,  and  with 
wages  of  labor.  This  meaning  is  now  being_abandoned__bx 
ecpnoTYiic  st.udentsL- 

A  wider  meaning  recently  given  to  the  word  by  many 
economists  turns  on  the  supposed  relation  of  some  portions 
of  price  to  cost  of  production.  Thus,  frequent  use  is  made  of 
the  expressions:  consumer's  rent,  producer's  rent,  buyer's 
rent,  seller's  rent,  etc.  In  the  well-founded  opinion  of  some 
recent  critics  this  usage  rests  on  a  mistaken  reasoning.  How- 
ever, in  the  midst  of  this  wide  variety  of  usage  the  student 
must  be  forewarned  and  alert.  Doubtless  agreement  will  at 
length  be  arrived  at.  Meantime,  no  economist  can  dictate 
what  meaning  is  to  be  attached  to  the  term,  but  one  may 
suggest  the  definition  that  seems  to  him  most  expedient. 
Throughout  this  work  we  shall  endeavor  to  use  the  term  rent 
uniformly  and  consistently  as  it  is  now  to  be  defined. 


I 

$1]  NATURE  AND  DEFINITION  OF   RENT  55 

4.  The,  essential  thought  in  rent,  as  we  shall  use  it,  is  that  The  essence 
it  is  the  value  of  the  usufruct  as  distinguished  from  the  value  of  rent 

of  the  use-bearer  or  thing  itself.  The  meaning  of  usufruct 
is  the  use  of  the  fruits,  or  in  legal  phrase:  ''the  right  of 
using  and  enjoying  the  income  of  an  estate  or  other  thing 
belonging  to  another,  without  impairing  the  substance." 
The  obvious  fact  is  that  fruits  can  be  eaten  without  destroy- 
ing the  tree,  the  harvest  gathered  without  destroying  the 
field.  By  a  metaphor  the  word  in  legal  discussion  is  applied 
to  the  use  of  any  product,  and  we  shall  employ  it,  as  in 
common  speech,  in  reference  to  one 's  own  goods  as  well  as  to 
the  goods  of  another. 

The  qualities  whose  use  gives  value  are  not  usually  inde-  Rented 
structible,  but  they  are  treated  as  undestroyed.     There  is  a  a^ntsare 

J  ,         *  looked  upon 

famous  phrase  used  by  Ricardo,  "rent  is  paid  for  the  origi-  as  durable 
nal  and  indestructible  qualities  of  the  soil."  He  said  "in- 
destructible, ' '  but  the  word  is  not  apt.  There  are  many 
qualities  in  the  fertile  field  that  must  be  destroyed  when  it 
is  used.  Every  economist  since  Ricardo 's  time  has  recog- 
nized this,  and  many  excuses  for  the  inaccuracy  have  been 
given.  After  every  harvest,  the  field  is  less  serviceable  than 
before,  and  if  it  is  to  be  of  the  same  grade  of  efficiency,  the 
fertile  elements  must  be  restored.  We  cannot  assert  that 
Ricardo  meant  undestroyed,  for  he  was  not  quite  clear  on  the 
question.  But  it  is  evident  that  one  can  count  as  true  in- 
come only  that  part  of  the  value  of  product  that  remains 
after  full  repairs  have  been  ma'de.  It  is  only  by  a  fiction 
that  most  indirect  agents  can  be  regarded  as  indestructible. 
Things  yielding  rent  are  not  indestructible,  but  generally  - 
they  are  preserved  undestroyed. 

5.  A  distinction  must  be  made  between  gross  and  net,  or  True  rent  a 
true  and  false  rent.     Before  the  usufruct  is  estimated,  al-  r 
lowance  must  be  made  for  repairs,  depreciation,  and  for  va- 
rious expenses  which  absorb  a  good  portion  of  the  gross 
product.     When  this  allowance  has  been  made,  the  income 

may  be  considered  as  a  net  sum  not  due  to  the  sale,  or  to 


56  THE  RENTING  CONTRACT  [CH.  8 

the  using  up  of  any  part  of  the  thing  rented.  This  is  th< 
essential  thought  in  typical  rent— that  it  is  the  value  of  the1 
surplus,  or  net  product,  of  an  economic  agent  leaving  the 
agent  itself  unimpaired  in  efficiency.  The  total  product  is 
sometimes  called  the  "gross  rent,"  but  economic  rent  is 
"net  rent."  This  thought  is  made  clearer  by  the  following 
discussion. 


§  II.      THE  HISTORY  OF  CONTRACT  RENT  AND  CHANGES  IN  IT 

1.  Economic  rent  (likewise  called  natural,  competitive, 
nft  sometimes  rack  rent)  is  to  be  distinguished  from  con- 
Iract  rent.  Economic  rent  is  the  market  value  of  the  usu- 
ruct, and  contract  rent  is  the  amount  a  man  pays  for  the 
use  of  wealth  by  virtue  of  an  existing  agreement.  The  one 
is  impersonal  or  economic;  the  other  is  personal  or  legal, 
being  fixed  by  agreements  between  persons.  The  rents  usu- 
ally spoken  of  are  contract  rents. 

The  two  diverge  more  or  less.  If  the  contract  has  been 
lately  made  the  two  will  be  nearly  the  same.  Contracts  of 
long  standing  often  bind  the  tenant  or  borrower  to  pay  either 
more  or  less  than  the  present  competitive  price.  If,  after 
a  time,  the  value  of  the  use  is  greater  than  the  contract  rent, 
the  tenant  is  fortunate  in  having  his  lease.  But  he  is  the 
loser  if  he  is  bound  by  lease  or  agreement  to  pay  rent  in  a 
locality  where  land  has  become  less  valuable. 

Economic  and  contract  rent  usually  diverge  also  because 
of  the  agreement  that  the  owner,  or  lender,  keep  up  the  re- 
pairs and  pay  the  taxes.  Here  it  is  simply  the  difference  be- 
tween gross  and  net  rent. 

Custom  may  prevent  the  owner  from  charging  all  the  usu- 
fruct of  the  agent  is  worth.  If  the  contract  rent  is  less  than 
the  economic  rent,  evidently  the  borrower  enjoys  a  part  of 
the  usufruct,  without  charge,  and  to  that  degree  is  in  the 
position  of  an  owner.  The  usufruct  in  this  case  is  divided 
between  the  two  parties.  Such  instances  were  numerous  in 


$  II]  HISTORY  OF  CONTRACT  RENT  AND  CHANGES  IN  IT    57 

40  Middle  Ages  in  the  renting  of  land,  and  still  are  found 

a  many  countries. 

Contract  rent  is  based  on  economic  rent  and  tends  to 
conform  to  it  whenever  there  is  competition.  The  exis- 
tence of  economic  rent  is  the  basis  of  the  agreement  to  pay 
contract  rent.  Prospective  hirers  of  agents  forecast  what 
the  use  will  be  worth  to  them  and  make  their  bids  accord- 
ingly. 

2.  The  renting  contract  is  the  agreement  of  a  borrower  to  The  renting 
pay  for  the  use  of  a  thing  and,  at  the  end  of  the  time,  to  re-  ">ntract  for 

.   .  the  use  of 

store  it  in  good  condition  or  pay  for  its  complete  repair.  In  wealth 
practical  business  it  is  necessary  to  have  definite  agreements 
to  prevent  disputes.  Some  provide  that  one  party,  some 
that  the  other  party,  shall  keep  up  repairs.  The  form  of  the 
renting  contract  is  observed  by  men  in  estimating  the  uses 
of  their  own  wealth  where  no  contract  exists.  If  they  count 
the  gross  product  of  an  agent  as  rent,  it  is  bad  bookkeeping. 
In  many  cases  it  is  necessary,  therefore,  to  follow  the  form 
of  the  renting  contract  in  order  to  determine  the  net  yield 
of  indirect  goods. 

3.  In  early  stages  of  industry  the  use  of  nearly  all  wealth 

is  estimated  under  the  renting  contract.  In  the  lower  stages  ^c^ 
of  culture,  in  hunting,  fishing,  or  nomadic  pastoral  tribes,  Ages 
land  is  not  recognized  as  wealth  to  be  exchanged  or  owned. 
But  at  a  later  stage,  as  in  the  Middle  Ages  in  Europe,  land 
and  the  things  pertaining  to  it,  as  ditches,  houses,  mills,  cat- 
tle, stock,  and  the  few  simple  implements,  constituted  the 
larger  portion  of  the  wealth.  Land  was  granted  to  the 
tenant  or  serf  in  return  for  services.  The  contract  was 
pretty  strictly  drawn  and  all  items  were  specified.  It  was 
not  hard  to  hold  the  tenant  to  his  contract  to  keep  the  land 
in  about  the  same  condition.  There  was  a  certain  rotation  of 
crops;  the  tenant  was  obliged  to  keep  his  stock  up  to  stan- 
dard; and,  moreover,  he  had  a  certain  interest  in  the  land 
because  his  contract  rent  (as  explained  above)  was  less  than 
the  economic  rent.  The  landlord,  therefore,  could  count 


58  THE   RENTING  CONTRACT  [CH.  8 

pretty  surely  on  the  undiminished  power  of  his  land  and 
stock  from  one  year  to  another. 

At  that  time,  truck  and  barter  were  the  common  modes  of 
exchange,  and  rents  were  paid  in  products  and  services,  not 
in  money.  The  fruits  of  the  soil  were  consumed  on  the  spot 
instead  of  being  sold  as  now.  Land  was  rarely,  if  ever,  sold 
outright,  so  that  there  was  no  occasion  to  estimate  its  total 
selling  value.  It  was  thought  of  as  a  place  on  which  to  live 
and  as  a  source  of  livelihood.  Its  yearly  use  was  all  that 
was  subject  to  contract,  sale,  and  exchange.  Not  the  land 
itself  but  a  rent  charge  on  the  land  was  sold,  the  term  rent 
charge  meaning  an  annual  sum  payable  out  of  the  yield  of 
an  estate.  Many  medieval  estates  were  so  tied  up  by  legal 
conditions  that  they  could  not  be  sold  outright;  all 
that  the  owner  could  do  was  to  sell  or  mortgage  the  annual 
rental.  Thus,  in  the  Middle  Ages,  it  was  all  but  universal  to 
look  upon  most  indirect  agents  as  exchangeable  only  under 
the  renting  contract,  as  subject  to  renting  but  not  to  com- 
plete transfer  and  sale. 

The  renting  4.  As  industry  developed,  the  renting  contract  remained 
convenient*  a^mos^  wholly  confined  to  cases  of  renting  lands  and  houses. 
in  commerce  The  materials  and  appliances  needed  for  manufacture  and 
commerce  are  so  manifold  and  varying  in  quality  that  the 
rent- form  of  contract  is  very  cumbersome  and  difficult  for 
exchangers  to  enforce.  If  a  merchant  about  to  embark  on 
a  trading  journey  wished  to  rent  a  ship  and  a  stock  of  goods, 
the  renting  contract  became  most  difficult  to  interpret.  He 
must  agree  to  repay  the  loan  in  goods  of  the  same  kind  and 
quality  as  those  received,  a  contract  most  difficult  to  execute, 
and  giving  occasion  to  costly  tests  and  countless  disagree- 
ments. It  was  much  easier  for  the  merchant  to  get  his  loan 
under  the  interest  contract,  i.e.,  a  money  loan,  with  which 
to  buy  the  goods.  With  the  growth  of  industry  and  com- 
merce, wealth  increased  in  towns,  taking  many  .forms,  as 
those  of  ships,  wagons,  tools,  and  stocks  of  goods,  that  could 
not  conveniently  be  rented. 

In  England,  the  country  which  developed  its  industrial 


§H]  HISTORY  OF  CONTRACT   RENT   AND  CHANGES  IN   IT    59 

system  earliest,  the  idea  of  rent,  therefore,  gradually  be-  The  thought 
came  disassociated  almost  entirely  from  the  use  or  hire  of  ° 
any  wealth  but  land  and  real  property.  Because  in  the  Mid-  with  a  rural 
die  Ages  rent  was  associated  almost  entirely  with  natural  re-  economy 
sources,  they  being  the  only  important  forms  of  wealth  which 
men  rented  from  others,  there  was  fostered  the  idea  that  the 
essential  mark  of  rent  is  the  connection  with  natural  re- 
sources. It  is  a  simple  example  of  the  association  of  ideas. 
In  the  transfer  or  loan  of  movable  goods,  the  rent  contract 
was  quite  overshadowed  by  the  other  form  of  contract,  that 
of  a  money  loan.  According  to  this  explanation  the  essential 
and  primary  difference  between  renting  wealth  and  borrow- 
ing money  at  interest  is  not  in  the  kind  of  wealth  whose  use 
is  thus  temporarily  transferred,  but  in_the  nature  of  the 
contract.  But  as  forms  of  wealth  differ  in  their  fitness  for 
transfer  under  the  two  forms  of  contract,  there  goes  on  a 
competition  between  them,  as  a  result  of  which  each  becomes 
associated  with  certain  groups  of  goods.  In  the  Middle 
Ages  the  renting  contract  was  the  dominant  form,  but  it  has 
been  progressively  displaced  by  loans  in  the  money  form,  and 
its  importance  is  still  declining. 

5.  The  main  forms  of  wealth  whose  usufruct  is  still  sold  Renting 
under  long  renting  contracts  are  land  and  its  more  durable  mosTused 
improvements.  In  England  farms  are  let  under  long  leases,  a  with  land 
very  common  form  being  the  thirty-year  lease.  Under  the 
old,  almost  fixed,  conditions  in  agriculture  such  a  lease  was 
equitable,  but  when  prices  are  rapidly  changing  and  when 
new  methods  are  being  introduced,  it  gives  rise  to  great  hard- 
ships. About  twenty-five  years  ago,  the  great  fall  in  the 
price  of  agricultural  products  brought  ruin  to  many  of  the 
tenant  farmers.  The  land  troubles  in  Ireland  have  been 
largely  about  tenants'  improvements.  When  the  lease  ex- 
pired, the  landlord  could  appropriate  all  the  improvements 
that  the  tenant  had  made.  In  America  farms  are  let  usually 
on  shares,  and  from  year  to  year,  but  the  plan  of  a  money 
rent  is  increasingly  followed.  The  difficulty  of  getting  an 
equitable  arrangement  between  landlord  and  tenant  is  recog- 


60 


THE  RENTING  CONTRACT 


[CH.  8 


But  many 
other  goods 
are  rented 


Economic 
rent  much 
wider  than 
the  renting 
contract 


nized  by  all.  The  landlord  must  make  the  proper  repairs  or 
see  that  they  are  made  ;  he  must  specify  in  the  contract  whe- 
ther the  products  can  be  taken  away  or  are  to  be  fed  on  the 
place  so  that  the  soil  may  not  be  impoverished,  and  he  must 
provide  for  the  purchase  of  other  fertilizers.  On  the  other 
hand,  the  tenant  under  the  renting  contract  has  little  motive 
for  improvement,  and  many  occasions  for  discontent.  So  in 
America,  far  more  than  in  the  older  countries,  land  changes 
hands  by  sale,  the  purchaser  going  into  debt  for  it,  giv- 
ing his  note  and  paying  interest  on  the  loan  rather  than  rent 
for  the  farm. 

Many  less  durable  goods  are  rented  for  brief  periods.  Car- 
riages are  rented  for  the  day,  bicycles  by  the  week  or  month, 
Sewing-machines,  boats,  guns,  tents,  and  even  diamond  en- 
gagement rings,  yield  their  joys  under  the  renting  contract. 
People  frequently  hesitate  between  the  renting  and  the  pur- 
chase of  a  piano,  and  in  some  cases  renting  is  the  more  con- 
venient and  desirable  way  of  securing  its  use.  The  purchase 
of  a  dress-coat  or  of  a  masquerade-suit  to  be  worn  but  once, 
involves  for  some  an  excessive  and  needless  sacrifice.  For 
a  moderate  sum  its  temporary  use  may  be  had,  and  it  is 
then  returned,  little  the  worse  for  wear,  to  the  accommo- 
dating clothier. 

A  final  word  of  caution  may  be  given.  Economic  rent  is 
not  confined  to  the  cases  of  contract  rent.  It  exists.  in-_gyery 
case  where  a  more  or  less  durable_agent  yields  a  use  that  is 
e!  The  owner  who  uses  a  thing  himself 


gets  the  advantage  in  the  product  as  clearly  as  if  he  collected 
rent  from  a  borrower.  Houses  lived  in  by  the  owners,  house 
furnishings,  clothing,  books,  all  scarce  and  durable  agents, 
are  yielding  rents  in  this  logical  sense.  To  the  economist, 
therefore,  the  problem  of  economic  rent,  as  one  of  the  grand 
divisions  of  the  problem  of  value,  remains  of  undiminished 
importance,  for  in  these  unceasing  streams  of  uses  emanating 
from  our  environment,  is  found  the  basis  for  the  value  of  all 
durable  wealth. 


only  with 

progressive 

difficulty 


CHAPTER  9 
THE   LAW   OF   DIMINISHING   RETURNS 

§  I.      DEFINITION  OF  THE   CONCEPT  OF    (ECONOMIC) 
DIMINISHING  RETURNS 

1.  The  phrase  "diminishing  returns  of  industrial  agents''  Economic 
is  the  expression  of  the  fact  that  there  is  an  elastic  limit  to  afenta  con' 
the  utility  any  indirect  good  can  afford  within  a  given  time,  be  obtained 
Successive  attempts  to  get  additional  services  from  a  thing 
are  usually  in  part  successful,  but  each  additional  service  is 
gained  with  more  difficulty,  or  a  smaller  added  service  ig 
gained  for  an  equal  expenditure  of  materials  or  effort, 
A  book  stands  many  hours  untouched  on  the  shelves  of  the 
library;  but  if,  as  often  happens,  two  or  more  persons  wish 
to  -use  it  at  the  same  hour,  time  and  energy  are  wasted.  The 
book  has  a  potential  use  during  the  twenty-four  hours,  but 
all  this  can  be  secured  only  at  the  cost  of  the  greatest  incon- 
venience. The  greatest  net  uses,  therefore,  are  seen  to  be  to 
the  first  user  and  in  the  first  hour,  for  these  uses  cost  the  least 
time  and  trouble.  If  the  members  of  a  family  will  take 
turns,  one  chair  will  serve  for  all  of  them ;  but  if  all  are  to 
be  able  to  sit  down  together,  a  chair  must  be  provided  for 
each.  Often  it  will  happen  that  only  one  chair  is  in  use,  the 
other  nine  chairs  being  valued  only  for  their  potential  uses. 
I  knew  two  young  men  who  owned  a  dress-coat  in  partner- 
ship, and  as  they  had  different  evenings  free  from  business 
all  went  well  until  both  were  invited  to  a  reception  which 
both  were  very  eager  to  attend. 

Illustrations  of  this  principle  may  be  drawn  from  every 

61 


62 


THE   LAW  OF   DIMINISHING  RETURNS 


[CH.  9 


This  is  true 
of  all  classes 
of  agents 


Decreasing 
technical 
effective- 
ness of 
material 
things 


class  of  durable  goods.  The  example  generally  given  is  that 
of  a  field  used  for  agriculture.  It  was  long  ago  seen  that 
a  larger  crop  could  usually  be  obtained  on  the  same  area, 
only  with  greater  effort  or  expenditure;  but  this  fact  has 
been  thought  to  be  peculiar  to  the  use  of  land.  The  examples 
given  above  have  been  purposely  chosen  from  very  different 
fields,  to  show  that  the  truth  is  a  general  one:  a  good  that 
affords  a  given  service  can  be  made  to  increase  that  service, 
ordinarily,  only  on  condition  that  men  put  forth  greater 
effort,  or  sacrifice  more  goods. 

,  The  decreased  utility  is  most  clearly  seen  in  the  diminished 
effect  which  other  agents  produce  when  used  in  connection 
with  the  thing.  When  several  are  trying  to  use  the  same 
book,  and  are  wasting  time  trying  to  get  it,  we  often  say  their 
study  hours  are  less  fruitful  because  of  the  poor  library  fa- 
cilities. Again,  we  speak  either  of  the  diminished  returns  of 
the  field,  or  of  the  labor  applied  to  the  field.  Either  the 
particular  thing  is  said  to  show  diminished  returns  or  the 
other  cooperating  agents  are  said  to  show  them. 

2.  As  the  agents  used  in  connection  with  a  fixed  amount 
of  any  other  agent  (for  mechanical,  chemical,  physiological, 
psychological,  and  other  purposes)  increase,  their  objective 
effectiveness  after  a  given  point  decreases.  Objective  or 
technical  effectiveness  means  effectiveness  independent  of 
the  thought  or  estimate  of  men.  It  is  not  the  effectiveness  to 
produce  a  feeling  in  men,  but  to  produce  results  on  the  ma- 
terial world.  In  a  mechanism,  if  one  part  is  increased  with- 
out increasing  the  other  parts,  a  point  is  reached  where  it 
does  not  add  to  the  result.  If  in  the  building  of  a  bridge  the 
weight  of  the  floor  is  increased  beyond  a  certain  point,  the 
rest  of  the  bridge  being  left  unchanged,  the  bridge  is  weak- 
ened instead  of  strengthened.  If  the  weight  of  the  iron  in 
the  framework  is  increased  beyond  a  certain  point  without 
strengthening  the  piers,  the  structure  is  weakened.  If  the 
pier  is  greatly  enlarged,  the  bridge  may  not  be  weakened, 
but  there  is  an  utter  waste  of  material  and  effort,  and  per- 


§JJ  DEFINITION   OF   THE   CONCEPT  63 

haps  the  main  purpose  of  the  bridge  is  defeated  by  the 
damming  up  of  the  stream.  A  bicycle  frame,  like  a  chain,  is 
no  stronger  than  its  weakest  part.  If  the  strength  of  all 
parts  of  the  wheel  and  frame  is  in  equal  proportion  to  the 
strain  they  must  bear,  added  weight  to  any  single  part 
weakens  the  whole  machine.  The  development  of  the  mod- 
ern type  of  bicycle,  by  many  experiments,  is  a  good  exam- 
ple of  the  adjustment  of  materials  according  to  the  principle 
of  technical  efficiency. 

A  variation  of  the  same  principle  is  seen  in  chemical  com- 
binations. Exact  proportions  of  materials  must  be  used  to 
get  a  certain  result.  Increase  of  one  ingredient  will  not  in- 
crease the  desired  product.  Either  the  added  part  is  rejected, 
does  not  enter  at  all  into  the  compound,  or  it  unites  to  form 
another  and  different  product. 

That  the  same  principle  holds  good  of  the  psychological 
effects  of  things,  we  have  already  fully  recognized  in  discuss- 
ing wants  and  marginal  utility.  A  given  amount  of  a  good 
will  affect  the  senses  in  a  pleasurable  way,  but  an  increase  in 
the  amount  will  not  cause  a  proportional  addition  to  plea- 
sure of  sight,  sound,  or  smell.  On  the  contrary,  such  an  in- 
crease may  defeat  the  object  entirely.  Here  we  are  at;  the 
thresjpjd  of  the  economic  problem,  for  we  have  touched  on 
"  feeling.  "• 

3.     The  idea  of  economic  diminishing  returns  arises  when  Economic 
man  recognizes  these  technical  facts  and  their  relation  to  ^msie"* 
gratification,  in  his  use  of  a  limited  supply  of  indirect  agents,  late  to  value 
All  economy  begins  with  scarcity.    The  varying  effects  pro- 
duced by  different  agents  therefore  require  to  be  studied  or 
the  sum  or  direct  goods  of  enjoyment  will  not  be  as  great 
as  is  possible.     Waste  will  take  place.    A  bridge  will  have 
its  maximum  use  with  a  minimum  outlay  when  the  parts  are 
in  a  certain  proportion.    Beyond  that  point,  the  increase  of 
any  part  may  add  something  to  the  usefulness  of  the  bridge, 
but  the  agents  must  be  taken  from  some  other  and  greater 
use. 


64 


THE  LAW  OF  DIMINISHING  RETURNS 


[CH.  9 


The  mar- 
ginal utility 
in  goods 


Meaning  of 
intensive 
margin  of 
utilization 


The  thought  of  economic  diminishing  returns  always  has 
reference  to  value.  If  a  particular  kind  and  amount  of  a 
certain  material  is  used  in  varying  combinations  with  other 
agents,  the  value  of  the  added  product  will  not  always  be 
in  the  same  proportion  to  the  value  of  the  added  agent. 
The  bridge-builder  must  consider  not  only  what  the  added 
material  will  add  to  strength,  but  what  it  will  cost,  and  whe- 
ther the  result  will  justify  this  expense.  So  the  economic 
problem  of  diminishing  returns  is  more  complicated  than 
the  mechanical  one,  for  it  contains  not  only  the  technical  but 
other  factors. 

If  the  value  of  the  product  increases  less  rapidly  than  the 
cost  of  the  agents  successively  added  to  secure  it,  a  point 
must  at  length  be  reached  where  the  value  of  the  added 
agents  and  of  the  additional  product  just  balance;  this  is 
called  the  point  of  marginal  utility/) 

If  a  certain  value  in  labor,  fertilizer,  or  material,  be  ap- 
plied to  an  acre  of  land,  it  may  be  more  than  recovered  in  the 
value  of  the  product.  Further  applications  give  a  product 
increased  not  in  equal  proportion  to  the  former  yield,  and  so 
on  till  the  value  of  the  last-added  agent  jusi  Glances  that  of 
the  added  product.  This  is  the  best  adjust:  tent  possible,  and 
beyond  this  point  there  will  be  a  deficit  in  value.  Just  where 
the  equilibrium  is  found  at  any  time  is  the  margin ;  of  J5.ultiv_ar. 
tion. 

The  term  ''cultivation"  is  taken  from  agriculture  but 
must  be  understood  in  the  broader  sense  of  utilization,  as  the 
principle  is  not  confined  to  the  case  of  land  or  agriculture, 
but  applies  as  well  to  the  use  of  furniture,  books,  clothing, 
horses,  or  any  other  indirect  agents. 

4.  There  are  two  margins,  the  intensive  and  the  ex- 
tensive. The  margin  of  utilization  in  the  case  of  a  single 
piece  of  wealth  is  called  the  intensive  margin.  Any  form  of 
indirect  wealth,  anything  kept  to  use,  may  be  considered  as 
containing  a  series  of  uses.  Using  one  thing  more  and  more 
while  uniting  other  things  with  it,  is  using  it  more  intensively. 


§1] 


DEFINITION   OF   THE   CONCEPT 


65 


Getting  more  use  out  of  the  book  by  effort,  out  of  the  farm 
by  applying  more  fertilizer,  out  of  the  house  by  putting  more 
people  into  it,  is  intensive  utilization.  The  earlier  uses  come 
easily,  naturally;  the  later  ones  are  gotten  with  increasing 
difficulty. 

When  a  number  of  agents  are  of  different  qualities,  the 
point  between  the  one  last  used  and  the  next  unused  is  the 
extensive  margin  of  utilization.  The  best  agents  that  are 
available  are  naturally  used  first,  but  as  they  are  more  in- 
tensively used  there  is  increasing  inconvenience.  Then  re- 
course must  be  made  to  the  inferior  agents,  whose  first  uses, 
however,  are  greater  than  the  later,  intensive  uses,  of  the 
better  grades.  When  the  step  is  made  to  the  use  of  agents 
that  were  before  unused  because  inferior,  it  is  extending  the 
margin  of  utilization.  The  intensive  margin  of  use  is  in  the 
particular  thing ;  the  extensive  margin  of  use  lies  outside  of 
this. 

M 


a 

4) 



3 

b 

^ 

N 

• 

* 

~^— 

6 

e 

€ 

o 

1 

•f 

f 

_£_ 

P 

1 

9 

9 

_9_ 

9_ 

^ 

h 

A 

A. 

A 

Q 

i 

T 

/ 

/ 

Fl 

Extensive  Grades  of  U-ses 

The  relation  of  the  two  margins  may  be  shown  in  a  simple 
diagram.  Let  the  better  grades  of  indirect  agents  be  repre- 
sented by  longer  rectangles,  the  upper  parts  of  which  repre- 
sent the  more  accessible,  more  easily  secured  utilities.  Each 
agent  consists  of  many  strata  of  uses.  The  best  uses  are 
grades  a,  b,  and  c,  in  M;  but  after  M  has  been  utilized  in- 

5 


sive  margin 
of  utiliza- 
tion 


66 


THE   LAW  OF  DIMINISHING  RETURNS 


[CH. 


tensively  down  to  d,  N  will  begin  to  be  utilized  at  its  highest 
point.  When  utilization  goes  down  to  f,  O  comes  into  use, 
and  so  on.  Therefore  it  will  be  seen  that  until  the  intensive 
margin  takes  in  d,  M  is  on  the  extreme  margin  of  utilization, 
and  N  is  just  outside  it ;  when-  the  intensive  margin  falls  to 
g  and  h,  P  is  inside  the  extensive  margin,  and  Q  is  just  out- 
side. 

The  marginal  utility  or  effectiveness  of  added  agents  tends 
to  be  equal  on  the  intensive  and  the  extensive  margins.  This 
is  simply  a  case  of  the  substitution  of  goods  in  the  use  of  in- 
direct agents.  If  the  value  of  the  added  product  in  the  use 
of  a  particular  good  decreases,  a  point  finally  is  reached 
where  it  is  better  to  transfer  the  outlay  to  another  agent,  to 
change  from  intensive  to  extensive  utilization,  to  go  over  to 
the  use  of  another  field  or  of  another  machine  not  so  good. 
The  effectiveness  of  the  labor  or  capital  that  men  have  to 
apply  is  being  compared  constantly  in  the  two  cases,  and  to 
the  extent  that  this  comparison  is  perfect  the  effectiveness  of 
the  agents  tends  to  be  equal  on  the  margin  in  the  two  appli- 
cations. 


Does  not 
mean  de- 
clining 
prosperity 


Nor  exhaus- 
tion of  the 
soil 


§  IL      OTHER   MEANINGS   OF   THE  PHRASE       DIMINISHING 
RETURNS ' ' 

1.  The  phrase  diminishing  returns  is  sometimes  taken  as 
meaning  merely  a  decrease  in  prosperity.     Many  ideas  are 
connected  with  this  phrase.     It  is  not  self-explanatory.     It 
suggests  various  thoughts  according  to  context  and  these 
have  not  failed  to  give  rise  to  different  uses.     The  student 
must  be  cautious  if  he  is  to  think  clearly  about  it.    If  popu- 
lation declines,  or  industry  changes  from  one  place  to  an- 
other, or  from  one  kind  of  goods  to  another,  it  is  sometimes 
said  that  returns  are  diminishing  in  the  deserted  district. 

2.  A  more  common  misuse  of  the  term  is  to  apply  it  to 
the  exhaustion  of  the  soil.    If  the  soil  of  a  district  has  been 
robbed  of  its  fertile  qualities  and  smaller  crops  are  raised 


5HJ       OTHER   MEANINGS  OF    "DIMINISHING   RETURNS"       67 

than  was  the  case  fifty  years  before,  it  is  said  to  be  a  case  of 
of  the  increased  difficulty  in  the  extraction  of  natural  stores 
in  mining.  The  veins  near  the  surface  being  mined  first, 
later  the  galleries  must  be  cut  deeper  and  greater  expense  in- 
curred to  get  the  stores.  But  the  conditions  here  are 
very  different  from  those  we  have  considered  under  dimin- 
ishing returns.  Mines  are  used  not  under  the  renting  con- 
tract, but  under  the  royalty  contract,  which  permits  and 
contemplates  a  progressive  using  up  of  the  limited  stores  of 
natural  resources. 

3.  Manufactures  are  often  said  to  show  increasing  returns  Fallacious 
in  contrast  with  agriculture  as  an  industry  of  decreasing  ^^ma 
returns.  There  is  here  an  inconsistent  shifting  of  thought,  ufacture 
Agriculture  is  thought  of  as  limited  to  a  certain  area  of  ^cultur 
ground,  whereon  evidently  diminishing  returns  will  take 
place.  But  the  fixed  limit  of  ground-space  is  not  thought 
of  in  connection  with  manufactures.  Taking  the  same  view 
of  manufactures,  commerce,  education,  etc.,  that  is,  assum- 
ing each  industry  to  be  confined  to  limited  area  of  ground, 
each  is  seen  to  be  subject  to  diminishing  returns.  Some 
ground-space  is  one  of  the  essentials  to  carry  on  any  business. 
If  the  attempt  is  made  to  accumulate  a  large  library  in  one 
small  room,  a  point  is  reached  where  much  energy  is  wasted 
in  trying  to  find  the  books.  In  a  university  the  psychical 
product,  education,  may  be  limited  by  the  need  of  space. 
The  school-room,  laboratory,  or  college  class-room  could  be 
used  at  midnight,  it  is  true,  but  not  conveniently;  and  as 
students  increase,  buildings  must  be  added.  The  same  is 
true  of  any  industry.  We  cannot  conveniently  increase  the 
business  of  a  lumber-yard  without  a  larger  yard-space,  or  of 
a  factory  without  a  larger  floor-space.  But  the  added  space 
may  be  gotten  by  spreading  horizontally  or  piling  up  per- 
pendicularly. A  ten-story  building  on  an  acre  lot  repre- 
sents ten  acres  of  floor-space.  Putting  up  higher  buildings 
is  an  expansion  in  area  by  the  more  intensive  utilization  of 
the  land.  Devices  like  elevators,  and  more  compact  appli- 


68 


THE   LAW   OF   DIMINISHING   RETURNS 


[CH.  9 


All  indus- 
tries if 
limited  as  to 
one  factor, 
as  area, 
show  di- 
minishing 
returns 


Confused 
with  the 
question  of 
large 
production 


Technical 
confused 
with  his- 
torical di- 
minishing 
returns 


ances,  make  possible  an  increasing  business  in  manufacture, 
trade,  or  commerce  upon  the  same  area  of  land.  All  indus- 
tries, if  looked  at  consistently  from  this  standpoint,  are  sub- 
ject to  the  same  condition,  though  it  is  true  this  will  make 
itself  felt  in  varying  degrees  in  different  lines  of  industry. 
In  agriculture  some  similar  devices  are  possible  by  the  use 
of  greenhouses,  but  it  is  true  that  in  it,  on  account  of  the  need 
of  sun,  light,  and  air,  the  limits  of  space  are  more  quickly 
felt,  and  are  less  elastic  than  in  most  other  industries.  The 
difference,  however,  is  one  of  degree,  and  not  of  kind.  Higher 
factories,  larger  stores,  enable  manufacturers  to  adapt  them- 
selves to  the  law  as  applied  to  the  surface  of  land,  but  not 
to  escape  its  operations.  Neither  the  law  of  gravitation  nor 
the  law  of  diminishing  returns  is  violated  or  broken  when 
materials  are  lifted  to  build  the  upper  stories.  Both  "laws" 
are  at  work,  even  when  the  building  is  rising  from  the 
ground.  Men  are  merely  adapting  their  conduct  to  the  con- 
ditions imposed  by  gravitation  and  diminishing  returns. 

Manufactures  usually  are  thought  of  as  enlarging  by  in- 
crease of  the  amount  of  capital  employed,  without  limita- 
tion as  to  the  area  covered.  But  even  here  a  limit  is  reached 
in  the  amount  of  capital  that  can  be  employed  at  any 
one  location  because  of  the  difficulty  of  widening  the  market. 
The  question,  however,  is  one  of  the  advantages  of  large  pro- 
duction with  large  capital,  not  of  the  increasing  use  of  a 
limited  area  of  land.  If  manufactures  and  agriculture  are 
to  be  compared  with  reference  to  their  economic  nature,  it 
is  essential  to  clear  thinking  that  both  be  looked  at  with  ref- 
erence to  the  same  conditions,  and  from  the  same  point  of 
view. 

4.  Technical  diminishing  returns  are  often  confused  with 
historical  diminishing  returns.  The  principle  of  technical 
diminishing  returns  is  that  at  any  given  moment  the  uses 
obtainable  from  any  indirect  agent  cannot  be  indefinitely 
increased  without  increasing  difficulty.  Historical  dimin- 
ishing returns  occur  when,  in  fact,  human  effort  is  less  boun- 


§111]  DEVELOPMENT   OF   THE  CONCEPT  69 

tifully  rewarded  in  a  later  period  than  in  an  earlier  one.  If 
to-day  a  day's  labor  in  agriculture  produced  less  than  fifty 
years  ago,  historical  diminishing  returns  would  have  oc- 
curred. In  fact,  labor  is  more  bountifully  rewarded  in  agri- 
culture than  fifty  years  ago,  yet  it  is  true  to-day  that  there 
are  few  fields  or  appliances  which,  if  used  more  intensively 
with  the  prevailing  prices  of  labor  and  material,  would  not 
show  a  diminishing  return  to  the  additional  capital  applied. 
Therefore,  in  the  historical  sense,  increasing  returns  have 
prevailed,  yet  at  every  moment  it  has  been  necessary  'to  apply 
resources  under  the  guidance  of  the  principle  of  diminishing 
returns. 


§  III.      DEVELOPMENT  OF   THE   CONCEPT   OF   DIMINISHING 
RETURNS 

1.     The  law  of  "diminishing  returns"  was  first  recognized  Recognition 
and  expressed  with  reference  to  the  use  of  land  in  aaricul-  ofdiminish- 

ing  returns 

ture.  There  are  several  evident  reasons  why  this  occurred,  to  land 
It  is  obvious  to  every  farmer  and  gardener  that  he  cannot 
indefinitely  increase  his  crop,  that  two  men  cannot  always 
produce  twice  as  much  as  one  man,  and  that  in  general  the 
product  does  not  always  vary  in  proportion  to  the  labor  and 
materials  applied.  Moreover,  the  food  supply  is  a  funda- 
mental factor  in  industry  and  in  the  welfare  of  states.  The 
limit  to  the  supply  of  food  on  a  given  area,  cultivated  by  a 
given  method,  early  appeared  and  became  a  serious  practi- 
cal problem.  >, 

The  circumstances  in  Europe  in  the  eighteenth  century 
drew  attention  to  the  subject.  Population  was  increasing, 
and  the  pressure  for  food  was  strong.  While  all  the  forms  of 
industry  most  common  in  cities  were  increasing,  and  the 
wealth  of  the  cities  was  growing,  poverty  was  increasing 
among  the  peasantry.  Especially  was  this  true  in  England 
during  the  Napoleonic  wars,  1793-1815,  owing  to  exceptional 
conditions.  The  food-supply  from  abroad  was  cut  off,  and 


70 


THE  LAW  OF  DIMINISHING  RETURNS 


[CH. 


This  con- 


diminishing 


Theprin- 


aiiofits 


when  the  English  farmers,  tempted  by  the  high  prices,  took 
poorer  land  into  cultivation,  and  sought  to  get  larger  crops 
from  their  older  fields,  a  great  object-lesson  was  presented  on 
the  principle  of  diminishing  returns  in  agriculture. 

2.  This  truth  of  diminishing  returns  in  agriculture  was 
confused  with  the  thought  of  historical  diminishing  returns. 
Circumstances  of  the  time  led  to  the  belief  that  because 
of  lack  of  food  misery  must  continue  among  the  masses  of 
men.     It  was  thought  inevitable  that  the  population  would 
continue  to  increase  and  food  become  more  scarce.    The  idea 
of  diminishing  returns  became  thus  a  prophecy  of  what 
would  happen,  a  social  philosophy,  that  aiffected  the  thought 
of  men  on  every  practical  social  question. 

3.  The  application  of  the  principle  of  diminishing  returns 
was  soon  broadened  to  include  land  in  other  than  agricul- 
tural  uses.     This  was  a  natural  and  inevitable  extension  of 
the  thought.    It  was  evident  that  an  unlimited  use  could  not 
be  made  of  a  limited  area  of  land,  in  any  industry  whatever. 
There  is  no  explanation  of  rent  of  business  sites,  residences, 
lots,  wharves,  waterfalls,  etc.,  unless  account  is  taken   of 
diminishing  returns.    If  it  were  possible  to  do  an  unlimited 
amount  of  business  upon  a  limited  area  of  land,  it  would 
never  get  more  scarce  and  could  never  rise  in  value.     The 
idea  of  diminishing  returns  came  properly,  therefore,  to  be 
applied  to  land  in  all  its  uses.    It  is  true,  however,  that  the 
relatively  large  areas  needed  in  agriculture  make  the  phe- 
nomenon  of  diminishing  returns  much  more  striking  in  it 
than  in  most  other  industries. 

4.  e  {  Diminishing    returns"   should    be    broadly    applied 
to  all  wealth  having  indirect  uses.     The  argument  for  this 
view  may  take  both  a  negative  and  a  positive  form.     Why 
should  we  say  that  the  principle  applies  to  land  and  not  to 
cases  of  other  industrial  agents?     Why  in  the  case  of  a 
waterfall  and  not  in  the  case  of  the  water-wheel?  Why  in 
the  case  of  the  field  and  not  in  the  case  of  the  trees  in  the 


DEVELOPMENT   OF   THE  CONCEPT  71 

field?    Are  they  not  all  scarce  and  desirable  goods  yielding 
a  limited  supply  of  uses? 

Positively  it  can  be  argued  that  the  concept  of  diminishing 
returns  is  indispensable  to  a  reasonable  explanation  of  the 
value  of  any  indirect  agents.  Anything  that  could  afford  an 
infinite  series  of  uses  at  once  would  be  an  infinite  supply.  If 
an  infinite  number  of  uses  could  be  gotten  out  of  one  hammer 
in  all  places  at  once,  it  would  pound  all  the  nails  in  the 
world.  One  wagon,  one  acre  of  land,  one  ax,  one  book  of 
each  kind,  would  serve  for  all  men,  and  duplicates  would  be 
valueless.  But  in  the  case  of  every  material  thing  there  is 
a  limit  of  convenient  and  economic  use. 

5.  Diminishing  returns  of  indirect  agents  is  a  special  case 
of  the  universal  law  of  the  diminishing  utility  of  goods.  returns 
Diminishing  returns  have  to  do  with  indirect  goods,  while 
diminishing  gratification  has  to  do  with  direct  or  consump-  * 
tion  goods.  They  are  two  species  or  aspects  of  the  same  gen- 
eral principle.  •'  If  the  supply  of  certain  indirect  agents  is 
increased,  thereby  increasing  consumption  goods,  the  utility 
of  the  indirect  agents  per  unit  diminishes.  In  such  a  case 
a  diminishing  return  is  the  reflection,  back  to  the  indirect 
good,  of  the  diminishing  utility  of  the  direct  goods  it  helps  to 
secure.  Any  indirect  agent,  added  to  a  fixed  amount  of  other 
agents  with  which  it  is  technically  used,  is  credited  with  a 
diminished  utility,  just  as  an  additional  supply  of  enjoyable 
goods,  coming  to  meet  a  fixed  demand,  falls  in  value. 

The, concept  of  technical  diminishing  returns  has  refer- 
ence to  a  limited  period  of  time.  Though  a  definite  agent 
may  have  bound  up  in  it  a  long  series  of  uses,  these  cannot 
be  secured  at  the  moment.  If  a  rent-bearer,  such  as  a  fruit- 
tree,  were  permanent,  and  men  could  wait  through  eternity 
for  its  yield,  they  would  get  an  infinite  yield  of  fruit.  But 
in  any  finite  period,  there  can  be  only  a  limited  yield. 

The  concept  of  diminishing  returns  is  one  aspect  of  the 
great  economic  law  of  proportionality,  that  is,  it  is  one  ex- 


72  THE  LAW  OF   DIMINISHING   RETURNS  [CH.  9 

The  basal  pression  of  the  fundamental,  axiomatic  truth,  that  there  is 
economics  a  ^es^  or  proper  adjustment  of  means  and  ends.  It  is,  there- 
fore, the  central  and  essential  thought  in  political  economy. 
On  it  depend  all  important  conclusions  with  reference  to  the 
value  of  indirect  goods.  Out  of  it  grow  the  important  eco- 
nomic theories  of  rent  and  capitalization. 


CHAPTER  10 

THE  THEORY  OF  RENT:  THE  MARKET  VALUE 
OF  THE  USUFRUCT^, 

§  I.      DIFFERENTIAL    ADVANTAGES    IN    CONSUMPTION    GOODS 

1.  Both  rent  and  the  value  of  durable  wealth  are  based  connection 
on  the  value  of  the  fruits  or  products  yielded  by  the  wealth.  be^^n 
Gratification,  afforded  directly  or  indirectly,  is  the  basis  of  tion,  rents, 
all  values.    The  relation  of  most  kinds  of  wealth  to  wants  is  and^ueo 

wealth 

indirect;  but  gratification  thus  afforded  indirectly  is  none 
the  less  the  basis  on  which  the  usufruct  of  wealth  is  esti- 
mated. Men  find  the  logical  or  causal  connection  between 
direct  goods,  or  final  product,  and  indirect  goods,  or  agents. 

To  explain  the  value  of  the  durable  wealth,  or  rent-bearer, 
a  still  farther  step  in  thought  must  be  taken.  The  value  of 
the  rent-bearer  is  based  on  the  series  of  rents  which  it  af- 
fords. To  explain  how  these  rents  are  added  to  give  the 
value  of  the  indirect  agents  is  the  task  of  a  theory  of  capitali- 
zation. This  being  the  relation,  a  change  in  the  value  of  the 
product  changes  the  rent,  and  this  in  turn  changes  the  value 
of  the  rent-bearer.  The  theory  of  rent,  therefore,  has  to. 
begin  with  a  review  of  the  valuation  of  enjoyable  goods. 

2.  In  a  group  of  consumption  goods,  all  of  the  same  qual- 
ity, the  marginal  utility  declines  as  the  quantity  increases. 
If  the  quantity  of  an  article  capable  of  ministering  to  man's 
wants  is  very  limited,  its  value  is  high.     If  the  supply  of 
something  of  uniform  quality,  for  which  there  is  no  sub- 
stitute, is  scanty,  the  value  is  estimated  without  reference 
to  any  other  grade.    If  a  fishing  tribe  caught  very  few  fish, 

73 


74 


THE   THEORY   OF   RENT 


[CH.  10 


but  these  were  all  equally  good,  and  if  no  other  food  were  to 
be  had,  fish  would  have  a  high  ratio  of  exchange  with  every 
other  kind  of  goods. 

If  the  quantity  increases,  the  value  of  each  unit  of  the 
whole  supply  falls,  as  the  importance  attributed  to  its  parts 
declines.  If  an  Indian  hunting-party  met  with  unusual  suc- 
cess, the  value  of  buffalo  meat  declined.  If  there  is  a  re- 
markable potato  crop,  potatoes  fall  in  value. 

3.  In  a  series  of  consumption  goods  of  different  qualities, 
the  lower  grades  acquire  value  only  as  scarcity  increases  in 
the  higher  grades.  If  difference  in  quality  between  two 
grades  of  apples  is  marked  and  there  is  a  superabundant  sup- 
ply of  the  best  grade,  no  importance  is  attached  to  the 
poorer.  But  if  the  better  grade  becomes  scarce,  the  appetite 
for  the  poorer  grade  increases,  and  finally  it,  too,  will  be 
consumed.  In  some  years  the  small,  knotty  apples  are  al- 
lowed to  rot  on  the  ground;  in  other  years  they  are 
gathered  and  are  sold  at  good  prices.  But  if  there  is  an 
abrupt  difference  in  quality,  and  hence  in  the  marginal  util- 
ity of  the  two  grades,  the  value  of  the  better  goods  may  rise 
considerably  before  there  is  any  recourse  to  the  poorer.  If 
the  differences  in  quality  are  very  slight,  the  presence  of  the 
lower  grades  has  the  effect  of  limiting  the  increase  of  value 

f  of  the  higher  grades.     Practically  in  almost  all  kinds  of 
goods  there  are  gradations  in  quality.    Complete  uniformity 

I  is  of  the  rarest  occurrence.  When  did  one  ever  see  a  basket 
XpJ  peaches  that  were  all  of  the  same  size,  ripeness,  color, 
flavor,  and  perfection?  If  the  step  from  the  higher  to  the 
lower  grade  is  very  slight,  resort  is  immediately  made  to  the 
next  lower  grade,  some  of  which  is  substituted  for  the 
higher. 

There  is  an  independent  reason  for  the  value  of  each  grade 
of  goods;  each  grade  would  have  value  if  there  were  none 
of  the  other,  but  they  mutually  affect  each  other's  value 
when  they  exist,  side  by  side,  in  the  same  market.  The  mar- 
ginal utility  of  each  is  lessened  by  the  presence  of  the  other. 


$ll]     DIFFERENTIAL   ADVANTAGES  IN   INDIRECT   GOODS      75 

And  thus,  two  or  ten  grades  constitute  for  many  purposes  a 
single  supply  as  they  shade  into  each  other  or  are  merged 
by  substitution. 


/  2  3  4- 

Grades  of  Consumption  Goods    by  Quality 

4.     Goods  of  the  lowest  grades,  having  no  marginal  utility,  Free  goods 
are  free  goods.    This  is  a  simple  truth,  but  it  has  important  J^0"^ 
bearings.    There  may  be  said  to  be  an  "extensive  margin  of  utilization 
utilization"  of  many  consumption  goods.    The  poorer  grades 
of  apples,  rotting  on  the  ground,  the  multitudes  of  waste 
things  not  valued,  are  on  the  margin  of  utilization.     When 
a  lower  grade  is  used,  the  margin  is  extended.    The  value  of 
goods  is  measured  upward  from  the  margin  of  utilization, 
but  this  is  simply  to  say  that  their  value  is  measured  from 
zero  upward. 

Likewise,  there  is  an  intensive  marginal  utility  in  con- 
sumption goods.  As  the  better  grade  of  apples  becomes  more 
scarce,  they  will  be  used  more  sparingly  and  kept  to  satisfy 
only  the  intenser  wants.  The  superiority  of  some  consump- 
tion goods,  either  in  quantity  or  quality,  often  is  exactly 
analogous  to  the  "differential  advantage"  spoken  of  by 
economists  in  the  case  of  productive  agents.  The  differential 
advantage  of  the  highest  grade  over  the  grade  of  free  goods, 
whose  value  is  zero,  evidently  is  the  whole  value  of  the  high- 
est grade. 

t^ 

§  II.      DIFFERENTIAL   ADVANTAGES   IN    INDIRECT    GOODS    * 

p 

K  1.     Rent  varies  with  the  quality  of  the  products  yielded 
by  agents,  other  things  being  equal.     Let  us  take  first  a 


76 


THE   THEORY   OF   RENT 


[CH.  10 


simple  case  where  the  agent  is  the  sole  condition  of  the  prod- 
uct. If  there  is  but  one  tree  bearing  a  certain  luscious  fruit, 
or  but  one  spring  yielding  a  mineral  water,  the  rent  of  the 
tree  or  spring,  being  equal  to  the  value  of  the  products 
must  vary  as  the  quality  of  the  products  varies.  If  two  or 
more  trees  are  standing  side  by  side,  they  will  be  compared 
with  regard  to  the  difference  in  the  quality  of  their  fruits. 
If  two  fields  differ  in  quality,  greater  importance  will  be  at- 
tached to  the  field  capable  of  producing  the  better  grade  or 
variety  of  fruit  or  product.  A  peculiar  mineral  quality  in 
the  soil  may  impart  to  wine  a  choice  flavor  that  can  at  once 
be  recognized  by  experts;  while  other  fields,  distant  but  a 
few  rods,  cannot  by  any  effort  be  made  to  produce  wine  of 
the  same  rare  quality.  There  is  said  to  be  a  marked  difference 
in  the  success  of  vineyards  lying  only  a  short  distance  apart 
on  the  shores  of  the  larger  lakes  of  New  York.  Nearness  to 
the  water  moderates  the  temperature,  often  prevents  frosts, 
and  hence  insures  the  ripening  and  quality  of  the  fruit.  In 
the  Santa  Clara  valley,  as  in  other  parts  of  California,  there 
is  a  frostless  belt,  sharply  marked  off  from  the  lands  where 
it  is  unsafe  to  attempt  to  cultivate  the  delicate  orange-tree 
and  other  semi-tropical  plants.  In  manifold  ways  differences 
in  geological  formation  affect  the  use  of  land  and  the  suc- 
cess of  many  industries.  On  one  side  of  a  little  creek  is  lime- 
stone land,  on  the  other  shale,  the  limestone  producing  a 
crop  larger  and  of  better  quality.  When  the  peculiar  nature 
of  the  one  field  is  found  to  be  the  cause  of  the  exceptional 
quality  of  its  fruits,  the  difference  in  value  is  attributed 
to  it. 

If  there  is  but  one  grade  of  agent,  it  is,  of  course,  valued 
without  reference  to  any  lower  grade.  The  effect  of  the 
presence  of  lower  grades  of  agents  is  to  lower  the  value  of 
the  higher,  inasmuch  as  the  lower  grades  are  substituted  for 
the  higher.  There  may  be  at  first  enough  of  the  higher  grade 
of  agents  to  produce  all  the  fruit  wanted  of  the  better  qual- 
ity. If,  then,  there  is  an  increasing  demand,  and  the  addi- 


§11]     DIFFERENTIAL  ADVANTAGES  IN  INDIRECT   GOODS      77 

tional  yield  can  be  secured  only  with  greater  effort,  the  value 
of  the  product  will  rise.  The  presence  of  poorer  grades,  how- 
ever, checks  that  rise,  because  use  can  be  shifted  to  them. 
The  value  of  grade  one  is  not  high  because  grades  two,  three, 
and  four,  which  are  worse  than  it,  are  available,  but  because 
they  are  not  of  better  quality  than  they  are.  Poor  as  they 
are,  their  presence  reduces  somewhat  the  intensity  of  demand 
for  the  best  grade.  Indirect  agents,  therefore,  are  seen  to  be 
subject  to  just  the  same  comparisons,  substitutions,  and  esti- 
mates, when  their  value  is  considered,  as  are  direct  consump- 
tion goods. 

2.     The  rents  of  two  agents  differ  as  do  the  quantities  of  Differential 
goods  yielded  by  them,  other  things  being  equal.     In  the  ^Y^fin 
case  just  considered,  the  quantity  remained  the  same  while  the  amount 
the  quality  differed;  now  is  to  be  considered  the  case  where  p^cts 
the  quantity  differs  while  the  quality  remains  the  same.    It 
is  possible  that  one  grade  of  agents  is  ''poorer"  because  it 
produces  less  fruit,  not  fruit  of  poorer  quality.     Consider 
first  the  static  problem.     If  both  agents  yield   fruits  ex-  • 
actly  alike,  the  value  of  equal  units  at  the  same  place  and 
time  must  be  equal,  and  the  usufructs  would  vary  in  just 
proportion  with  the  quantity  of  product.    Now  consider  the 
dynamic  problem.     If  the  desire  for  that  fruit  increases, 
rent  would  grow  as  scarcity  became  more  felt.     The  agents 
yielding,  under  the  prevailing  conditions,  the  largest  product, 


A  BCD 

Grades  of  Agents  by  amount  of  Product  of  Uniform  Quality 

would  first  be  used ;  later,  the  poorer  agents.  The  possibility 
of  resorting  to  the  poorer  agents  would  keep  the  better  from 
rising  so  high. 


78  THE   THEORY  OF   RENT  [CH.  10 

3. .  When  two  agents  are  necessary  to  secure  a  prod- 
uct>  the  value  attributed  to  each  is  influenced  by  competing 
uses.  The  thought  of  one  agent  independently  producing  a 
certain  product  is  far  too  simple  to  correspond  with  reality. 
Two  or  more  agents  unite  to  produce  a  single  product,  and 
each  agent  at  the  same  time  can  be  used  for  acquiring  other 
products.  Complex  as  the  problem  appears,  it  is  solved  ac- 
cording to  the  principle  of  marginal  utility  at  every  moment 
in  every  market.  The  different  uses,  figuratively  speaking, 
bid  for  an  agent,  and  thus  its  marginal  utility  is  determined 
just  as  is  the  price  of  a  good  by  the  bidding  of  buyers.  In- 
deed, it  is  the  bidding  of  buyers,  indirectly.  The  more  ur- 
gent the  use,  the  higher  the  bid.  The  felt  importance  is  re- 
flected from  the  consumption  goods  that  are  sought,  to  the 
agent  that  will  aid  to  get  them.  Two  or  more  agents  that  are 
mutually  needed  for  the  acquiring  of  a  product  are  comple- 
mentary goods.  A  complementary  agent  may  be  either  other 
material  agents  or  labor. 

When  labor  is  applied  to  an  agent,  either  to  improve  the 
quality  or  to  increase  the  quantity,  it  is  subject  to  the  law  of 
diminishing  returns.  In  the  effort  to  increase  the  quantity 
of  products,  labor  is  applied  first  more  intensively  to  the 
better  agents.  If  it  meets  with  resistance,  if  returns  dimin- 
ish, it  is  transferred  to  any  of  the  poorer  agents  that  have 
in  them  uses  of  as  high  grade  as  those  still  in  the  better  agent. 
The  superior  effectiveness  of  the  earlier  over  the  later  units 
of  the  added  agent  is  called  the  "differential  advantage"  of 
the  two  fixed  agents.  The  result  of  a  day's  labor  applied 
to  a  field  may  be  represented  by  100,  a  second  day 's  labor  by 
90  (it  being  only  ninety  per  cent,  as  effectual),  a  third  day's 
labor  by  75 ;  but  it  is  more  usual  to  say  that  the  first  field 
produces  10  more  than  the  second  and  25  more  than  the 
third,  the  second  15  more  than  the  third.  To  the  agent 
fixed  in  supply  is  attributed  the  difference  in  the  effective- 
ness of  the  agent  that  is  applied. 

4.     The  marginal  uses  of  indirect  goods  are  free  uses. 


§11]     DIFFERENTIAL  ADVANTAGES  IN  INDIRECT   GOODS      79 

Here  again  is  noted  the  close  parallelism  in  the  process  of   Therentiess 
evaluating  direct  and  indirect  goods.    There  is  an  extensive  ^nsnlve 
margin  in  the  use  of  an  indirect  agent,  a  point  in  the  grada-   of  agents 
tion  from  the  better  to  the  poorer  agents  where  the  materials 
and  forces  are  left  unused  and  have  no  value.    Land  beyond 
that  point  is  free.     Outworn  goods  in  manifold  forms,  old 
pictures,  old  machines,  having  no  longer  charms  even  for  a 
rummage  sale,  form  a  no-rent  margin  of  wealth.     On  every 
hand  a  great  multitude  of  things  unused  and  worthless  differ 
by  only  a  shade  from  things  that  still  are  used  and  valued. 
Every  rubbish-heap,  rag-bag,  junk-shop,  and  garret  contains 
things  once  prized,  now  lingering  on  the  margin  of  utiliza- 
tion. 

There  is  also  in  agents  an  intensive  margin,  beyond  which 
are  certain  unexploited  uses  in  the  things  that  we  already 
have.  This  is  a  more  subtle  thought,  but  it  has  been  already 
discussed  in  connection  with  diminishing  returns.  These 
potential  uses  in  agents,  uses  which  in  the  existing  conditions 
lie  outside  the  margin  of  utilization,  of  course  have  no 
value.  We  have  noted  that  there  is  an  equilibrium  between 
these  two  margins.  Rent  is  measured  from  a  zero  point  of 
utility  either  in  a  good,  or  in  other  poorer  grades  of  goods. 

A  corollary  of  this  proposition  is  that  there  is  a  limit  to  , 
the  rental  that  anything  can  yield  under  any  given  condi- 
tion. Below  the  present  margin  of  utility  of  any  goods 
there  exist  great  quantities  of  free  goods,  unused  goods,  or 
unexploited  uses.  It  is  only  uses  above  this  margin  that 
yield  rent.  Rent  is  the  difference  between  the  value  of  the 
better  grades  and  the  value  of  the  free  goods.  It  is  there- 
fore due  to  the  limitation  in  the  supply  of  indirect  agents 
of  the  better  quality,  or  to  the  scarcity  of  the  more  effective 
uses  in  those  agents. 

5.     Rent  may  be  redefined  as  the  value  of  the  scarce  uses  Restate- 
of  wealth  within  a  given  period.    Rent  is  the  felt  importance  ^££0- 
of  the  usufructs  of  agents  in  securing  gratification.     It  is   nomicand 
measured  by  the  marginal  utility  of  any  particular  grade 


80 


THE   THEORY   OF    RENT 


[CH.  10 


J 


Economic 
rent  is 
primary 


of  agents  in  securing  products.  These  definitions  and  the 
discussion  throughout  this  chapter  applies  to  economic  rather 
than  to  contract  rent.  In  fixing  and  agreeing  on  contract 
rent,  men  are  seeking  to  estimate  the  importance  of  indirect 
goods,  the  importance  that  an  agent  will  have  in  getting  a 
product.  They  are  bidding  for  the  use  of  things,  and  what 
they  bid  is  contract  rent.  Contract  rent  is  based  on  the 
existence  of  economic  rent.  I  Economic  rent  does  not  depend 
on  contract  rent,  but  on  the  differences  in  the  effectiveness 
of  agents  to  secure  a  given  product.j  If  there  were  not  dif- 
ferences in  the  product,  and  no  limits  to  the  supply  of  in- 
direct agents,  rent  could  not  exist ;  it  would  be  inconceivable. 
But  these  differences  existing,  economic  rent  inevitably 
arises,  for  men  cannot  keep  from  attaching  value  to  the 
things  that  affect  their  desires.  Contract  rent  in  turn  ap- 
pears wherever  the  use  of  wealth  becomes  an  object  of  ex- 
change and  agreement  between  men  in  a  free  society. 


CHAPTER  11 

REPAIR,  DEPRECIATION,  AND    DESTRUCTION    OF 
WEALTH :  RELATION  TO  ITS  SALE  AND  RENT 

§  I.      REPAIR  OP  RENT-BEARING  AGENTS 

1.  The  continued  rent  of  indirect  agents  is  dependent  on  Tneneces- 
the  continual  repair  of  certain  parts  necessary  for  their  Slt7.ofre" 
efficiency.  All  earthly  things  wear  out  or  decay.  When-  nearly  au 
ever  man's  hand  is  withheld,  nature  takes  possession  of  his  e 
work,  regardless  of  his  purposes.  Dust  gathers  on  unused 
clothes,  and  moths  burrow  in  them.  Shut  up  a  house,  and 
windows  are  shattered,  roofs  leak,  and  vermin  swarm.  To 
close  a  factory  is  to  hasten  the  time  when  buildings  and  ma- 
chinery will  be  piled  upon  the  rubbish  heap.  The  most  mag- 
nificent and  solid  works  of  man  have  crumbled  under  the 
finger  of  time.  The  earth  is  strewn  with  ruins  of  gigantic 
engineering  works,  aqueducts,  canals,  temples,  and  monu- 
ments, whose  restoration  would  be  no  less  a  task  than  was 
their  first  building.  Everywhere  vigilance  and  repairs  are 
the  conditions  of  continued  uses  of  wealth.  Some  works  of 
nature,  such  as  waterfalls,  may  appear  to  have  a  continued 
use  without  repair,  but  they  bear  rent  only  when  used  with 
other  things  that  must  be  constantly  mended.  A  certain 
amount  of  labor  on  the  banks  of  the  mill-stream,  and  certain 
repairs  on  the  dam,  the  water-wheel,  and  the  gates  are  neces- 
sary. By  a  fiction  in  business  contracts  the  waterfall  may 
be  dealt  with  apart  from  those  conditions  to  its  use,  and  may 
be  rented,  as  a  field  is,  with  the  agreement  that  the  tenant 
keep  up  the  repairs. 

6  81 


82 


REPAIR  AND  DEPRECIATION  OF  WEALTH 


[CH.  11 


The  fertile 
lands  of 
large  re- 
gions have 
lost  their 
usefulness 


Wearing  out 
of  some 
American 
lands 


The  efficiency  of  land  as  mere  standing-room  usually  does 
not  seem  to  be  dependent  on  repairs.  But  here  again  the 
land  yields  rent  in  connection  with  other  rent-bearing  agents 
(such  as  houses  and  other  agents  above  ground),  which  must 
be  repaired.  Standing-room  on  land  is  not  a  complete  indi- 
rect agent;  it  is  but  one  of  the  conditions  for  carrying  on 
an  industry,  and  even  it  often  requires  repairs  to  make  it 
usable.  Ranging  from  these  extreme  cases  of  stableness  and 
durability,  indirect  agents  vary  to  the  extremes  of  fragility 
and  ephemeralness. 

2.  Most  of  the  qualities  that  contribute  to  make  land  fer- 
tile in  agriculture  being  destructible,  the  constant  repair  of 
tilled  land  is  necessary  to  its  continued  fertility.  If  any 
things  could  be  said  to  be  indestructible,  they  would  be  some 
of  the  works  of  nature.  In  a  sense,  all  matter  is  indestructible. 
Man  cannot  annihilate  it,  he  can  simply  change  its  condition. 
But  in  economic  discussion  it  is  the  value  of  things  that  is 
being  considered,  and  from  this  point  of  view  everything  is 
in  some  degree  destructible.  The  effects  of  bad  husbandry 
are  everywhere  apparent,  and  in  many  regions  fertile  fields 
have  been  physically  and  economically  destroyed.  In  Asia, 
lands  that  once  supported  millions,  perhaps  hundreds  of 
millions,  of  population  are  now  deserts.  Egypt,  for  a  time 
reduced  to  a  semi-desert  condition,  has  only  in  the  past 
century  been  restored  to  a  certain  extent  by  the  use  of  new 
methods  and  a  return  to  the  old  ones.  Many  of  the  areas 
that  were  the  granaries  of  Rome  can  now  hardly  support  a 
sparse,  half -starving  population.  The  lands,  or  at  any  rate, 
the  elements  that  gave  them  value,  have  been  destroyed. 

Even  in  young  America  may  be  seen  the  effect  of  a  failure 
to  keep  land  in  repair.  As  the  new  rich  lands  of  the  West 
were  opened  up,  the  old  lands  in  the  East  were  allowed  to 
wear  out,  and  many  of  them  were  abandoned.  On  the  new 
lands  in  turn  the  same  methods  were  followed,  using  up  the 
first  rich  store  of  fertility  with  no  attempt  to  keep  up  the 
quality  of  the  soil.  This  may  have  been  the  best  policy  for 


§l]  REPAIR  OF  RENT-BEARING  AGENTS  83 

the  time;  it  would  not  have  been  economical  to  employ  Old 
World  methods  of  intensive  husbandry  when  such  rich  ex- 
tensive areas  were  being  opened  up.  But  the  process  was 
one  destructive  of  natural  resources.  As  settlement  moved 
westward,  great  forests  fell  in  ashes,  and  the  soil  was  robbed 
of  the  fertile  elements  which  it  had  taken  centuries  for  na- 
ture to  store  up. 

3.  The  machinery  and  appliances  used  in  transportation  wearing  out 
and  manufacturing  are  all  perishable  in  varying  degrees.  UJJj^JJf8 
Take  as  an  example  the  great  agency  for  transportation,  the  road 
railway.  The  roadbed,  which  is  but  the  natural  soil  ex- 
cavated or  filled  to  a  better  grade,  is  the  most  permanent 
part ;  yet  every  frost  weakens,  every  rain  undermines,  a  por- 
tion of  it.  Earthquake,  landslide,  and  flood  fill  up  the 
ditches,  or  tear  down  the  embankments.  Constant  work  is 
needed  to  keep  it  fit  and  safe  for  use.  Above  this  is  the 
track,  slightly  less  permanent,  more  frequently  changed. 
The  ties  rot,  and  even  the  rails  of  steel  must  be  at  times  re- 
placed. The  rolling-stock  is  still  less  durable,  and  the  differ- 
ent parts  vary  in  length  of  life.  It  is  said  that  the  wheel- 
tires  are  renewed  four  times,  the  boiler  three  times,  and  the 
paint  seven  times,  before  a  locomotive  is  entirely  worn  out. 
The  oil  used  in  the  wheel,  which  is  a  necessary  part  of  the 
running  machine,  has  to  be  applied  every  day. 

There  is  a  great  difference  in  the  length  of  life  of  manu-  Depreciation 
facturing  appliances.     The  building  is  fairly  durable;  yet  Jac^g 
an  average  depreciation-rate  of  one  and  one  half  per  cent,  appliances 
a  year  must  be  allowed  to  offset  a  reduction  in  its  value 
of  over  fifty  per  cent,  in  thirty  years.     Machinery  differs 
greatly  in  durability;  well-made,  substantial  machinery  de- 
preciates about  five  per  cent,  yearly.    The  engines  and  boil- 
ers depreciate  more  rapidly  than  the  running  gear ;  the  loose 
tools  have  to  be  replaced  every  second  to  fourth  year ;  while 
the  materials  consumed  in  the  industry  must  be  repaired  and 
replaced  at  every  repetition  of  the  process  of  manufacture. 
If  a  factory  is  to  be  maintained  in  its  efficiency  in  accordance 


84 


REPAIR  AND   DEPRECIATION   OF   WEALTH 


[CH.  11 


Neglect  of 


effects 


But  some- 
times is 
economical 


with  the  terms  of  the  renting  contract,  and  is  to  continue  its 
renting  power,  everything  about  it  must  be  from  time  to 
time  repaired  and  replaced. 

4.  Neglect  or  postponement  of  repairs  must  cause  a 
falling  off  of  the  rent-earning  power.  The  neglect  of  repairs 
may  have  different  results  in  the  factory.  The  neglect  of 
one  kind  simply  reduces  present  rental  while  not  preventing 
the  future*  restoration  of  the  plant  to  its  full  efficiency.  If 
certain  necessary  tools  wear  out  and  are  not  replaced,  the 
factory  as  a  whole  will  be  less  efficient.  Each  part  of  the 
entire  outfit  being  needed  in  due  proportion,  the  loss  in  rental 
will  correspond  not  merely  to  the  lost  efficiency  of  the  miss- 
ing tools,  but  to  the  crippled  efficiency  of  the  remaining  ap- 
pliances. Failure  to  apply  seed  to  the  land  causes  the  land 
as  a  whole  to  be  useless  for  that  year's  crop.  In  other  cases, 
neglect  of  repairs  increases  the  expenses  of  repairs  and  cuts 
off  future  rental.  The  adages,  "A  stitch  in  time  saves  nine," 
and  "An  ounce  of  prevention  is  worth  a  pound  of  cure," 
must  be  acted  upon  in  every  industry.  The  neglect  to  repair 
a  roof  causes  damage  to  an  amount  many  times  the  cost  of  a 
new  roof.  Failure  to  replace  a  bolt  costing  five  cents  may 
result  in  the  rack  and  ruin  of  a  machine  worth  many  dollars. 
A  handful  of  earth  on  a  dike  may  save  a  whole  country 
from  destruction. 

Neglect  of  repairs  may  be  economical,  however,  when  outer 
conditions  have  first  reduced  the  demand  for  the  agent  and 
consequently  the  rental.  When  the  line  of  travel  changes, 
it  does  not  pay  to  keep  an  old  hotel  up  to  the  same  state  of 
repair  as  when  it  had  a  great  patronage.  Old  factories  some- 
times may  better  be  allowed  to  depreciate  while  the  price  of 
repairs  is  invested  in  more  prosperous  industries.  In  a  de- 
clining neighborhood  the  houses  fall  into  decay,  the  owners 
seeing  that  "it  would  not  pay"  to  keep  them  up. 


§11]       DEPRECIATION   OF   AGENTS  KEPT  IN   REPAIR  85 


§  II.      DEPRECIATION   IN   RENT-EARNING   POWER  OP   AGENTS 
KEPT   IN    REPAIR 

1.  Even  where  repairs  are  thoroughly  kept  up  and  pres-  Repairs  can 
ent  rent  is  undiminished,  future  rents  may  be  decreasing  n^^Jays 
because  of  natural  decay.    "Changes  go  on  in  the  substance  ultimate de- 
of  things  which  cannot  be  prevented  by  any  attention  to 
repairs.     The  wood  in  a  framework  will  decay,  the  metals 
crystallize.  There  is  also  an  unpreventable  wear  of  parts  that 
cannot  be  replaced  without  replacing  the  whole  machine.    It 

is  the  aim  of  the  modern  manufacturers  to  make  machines 
like  the  wonderful  one-horse  shay,  every  part  of  equal  dura- 
bility. The  development  in  America  of  the  system  of  "in- 
terchangable  parts"  has  greatly  simplified  and  cheapened 
repairs,  and  has  lengthened  the  working  life  of  machines; 
nevertheless  their  lot  is  the  scrap-heap  at  last.  This  general 
depreciation  appears  to  be  nearly  avoided  in  large  factories 
where  there  is  serial  replacement  of  the  parts,  but  occasion- 
ally some  invention  or  some  improvement  of  process  necessi- 
tates an  almost  completely  new  equipment.  An  old  man  once 
said  to  me:  "I  have  lived  in  this  house  forty  years:  it  was 
well  built,  has  been  repainted  regularly,  has  never  been  al- 
lowed to  leak  a  drop,  and  it  is  as  good  as  it  ever  was.  I  see 
no  reason  why  it  could  not  be  kept  to  eternity  if  always 
kept  in  repair."  But  the  same  could  not  be  said  of  the 
house  now.  In  general,  there  is  finally  a  termination  of  the 
rent-earning  power  of  wealth,  and  the  whole  has  to  be  re- 
placed. 

2.  A  change  in  inventions  and  processes  may  reduce  the  Technical 
rent  of  agents,  independently  of  their  material  condition, 

Rent  is  dependent  on  the  indirect  relation  of  things  to  wants ;  uses  of 
that  relation  may  be  changed  if  some  other  agent  is  found  agents 
fitted  to  serve  these  wants  more  directly.     Not  only  do  the 
materialsjaf  houses  change,  but  fashion  and  engineering  skill 
change,  making  the  old  mansions  cheerless  and  inconvenient, 


86  REPAIR  AND  DEPRECIATION  OF  WEALTH       v  [CH.  n 

and  affecting  their  rent-earning  power.  At  every  moment, 
in  a  progressive  society,  many  rent-earning  agents  are  being 
thrown  out  of  use.  The  machinery  in  flour-mills  has  been 
almost  completely  changed,  parts  of  it  repeatedly,  while 
the  roller  process  has  been  substituted  for  the  old  millstones. 
Water-power,  because  of  its  uncertainty,  has  been  replaced 
in  many  places  by  steam-power,  'and  in  many  places  steam- 
power  in  turn,  has  been  rivaled  by  water-power  since  the 
improvements  in  the  generation  and  transmission  of  elec- 
tricity. A  change  in  the  process  of  making  paper  threw  out 
of  use  much  machinery  that  was  only  in  part  saved  by  its 
removal  and  adaptation  to  the  making  of  coarser  grades  of 
paper.  Many  minor  inventions  in  the  iron  industry,  still 
more  the  invention  of  the  Bessemer  process,  threw  out  of 
use  great  numbers  of  the  old  appliances. 

3.  A  change  in  the  outer  conditions  that  give  occasion  to 
the  use  of  agents  may  cause  depreciation.  The  exhaustion 
of  materials  on  which  machinery  is  employed  may  reduce  its 
usefulness.  A  sawmill  located  in  the  midst  of  a  forest  has 
a  high-earning  power  while  the  forest  lasts,  but  when  the 
forest  is  cut  off  the  mill  itself  declines  in  value.  Unless  it 
can  be  removed  to  another  forest  and  thus  have  its  earning 
power  renewed,  it  will  have  the  value  only  of  scrap-iron;  it 
has  become  an  indirect  agent  in  the  wrong  place.  Oil -boring 
machinery  where  a  rich  supply  of  oil  is  found  has  a  high 
rental  for  a  time,  but  when  the  oil-fields  give  out  the  ma- 
chinery falls  in  value,  being  worth  more  or  less  than  the 
cost  of  transporting  it  according  as  the  next  oil-field  is  near 
or  far.  Changes  in  fashions,  calling  for  different  kinds  of 
products,  cause  a  depreciation  in  the  value  of  the  old  agents. 
Coarse  salt,  evaporated  by  the  sun,  was  used  by  our  fathers, 
but  the  finer  product  of  the  steam  process  is  driving  out  the 
product  of  the  old  solar  plants.  As  homespun  went  out  of 
use,  much  machinery  still  in  good  physical  condition  was  cast 
aside.  Changes  in  transportation  work  revolutions  in  indus- 
trial methods.  Many  prosperous  small  forges  on  the  country 


§111]    DESTRUCTION  OF  NATURAL  STORES  OF  MATERIALS    87 

roads  of  Pennsylvania  became  valueless  after  the  building 
of  the  railroads.  New  forges  were  built  at  favored  points 
where  materials  and  products  could  be  shipped  by  rail. 

4.     The  agents  employed  in  any  industry  range  from  the  various 
more  efficient,  high  rent,  down  to  the  less  efficient,  low  rent,  2^en°f 
grades  in  a  more  or  less  regular  series.     It  follows  that  as  rent- 
these  changes  are  going  on,  the  place  of  agents  on  the  scale  bearers 
of  efficiency  is  constantly  shifting.    The  various  agents  rep- 
resent all  grades  of  efficiency.     One  depreciates,  possibly  is 
restored  later  and  takes  a  high  place,  and  again  depreciates 
until  finally  it  is  thrown  out  of  use.    One  loom  embodies  the 
latest  improvements   and   corresponds   to  the  most   fertile 
field ;  another  can  still  be  made  to  yield  a  little  rent ;  the  use 
of  a  third  results  in  certain  loss.    A  great  mass  of  no-rent 
agents  lie  just  below  the  margin  of  utilization  in  every  in- 
dustry.    Some  of  these  are  permanently  abandoned;  some 
will  be  taken  back  into  use  when  business  conditions  im- 
prove.   When  the  iron  industry  is  dull,  many  forges  are  out 
of  blast ;  but  when  iron  is  again  in  demand,  there  is  a  gradual 
taking  up  of  the  abandoned  forges,  factories,  and  machines 
as  they  are  brought  within  the  margin  of  profitable  utiliza- 
tion.   Many  agents  not  actually  earning  a  rent,  may  become 
rent-earning  through  a  change  in  business  conditions. 

§  III.      DESTRUCTION  OF  NATURAL  STORES  OF   MATERIALS 

1.    A  large  part  of  industry  is  now  conducted  without  re-  Destruction 
gard  to  the  preservation  of  the  source  of  income.    A  striking  J^Jj^ 
example  of  this  is  the  use,  or  rather  the  destruction,  of  the  forests 
American  forests.    In  the  last  century  the  demand  for  lum- 
ber grew  rapidly  both  on  account  of  domestic  needs  and  of 
the  needs  of  the  older  countries.     Great  quantities  of  wood 
have  been  used  and  still  greater  quantities  wasted,  trees 
being  girdled,  the  ground  burned  over,  the  timber  destroyed 
in  any  way  that  would  clear  the  soil — timber  which  to-day 
would  be  of  far  more  value  than  is  the  cleared  land  on  which 


88 


REPAIR   AND  DEPRECIATION   OF  WEALTH 


[CH.  11 


it  stood.  Considering  present  needs  and  conditions,  the  labor 
seems  to  have  been  worse  than  wasted. 

The  direct  effect  of  this  destruction  of  the  supply  has  been 
the  increase  in  the  value  of  timber.  To  the  settlers  much  of 
the  timber  was  worse  than  useless ;  they  paid  and  labored  to 
get  rid  of  it ;  now  the  supplies  of  lumber  must  be  sought  on 
the  very  margins  of  our  territory:  Florida,  Maine,  northern 
Michigan  and  Wisconsin,  Washington,  and  Oregon.  The 
supplies  in  Washington  and  Oregon  are  almost  unavailable 
in  the  Eastern  states  on  account  of  the  cost  of  transportation. 
Professor  Marsh,  thirty  years  ago,  strikingly  characterized 
the  policy  that  has  been  pursued :  * '  We  are  breaking  up  the 
foundation  timbers  and  the  wainscoting  of  the  house  in 
which  we  live  in  order  to  boil  our  mess  of  pottage." 

The  indirect  effects  of  these  changes  are  fully  as  great  as 
the  direct  ones.  Forests  greatly  affect  climate,  temperature, 
and  soil ;  they  influence  the  humidity.  They  equalize  the  flow 
of  streams,  moderate  floods,  and  by  preventing  the  washing 
down  of  the  rich  soil,  keep  the  mountain  sides  from  be- 
coming bare  and  sterile  rocks.  So,  within  the  last  two  decades, 
the  people  in  America  have  begun  to  think  of  forestry.  Its 
purpose  is  to  restore  the  forests  to  the  condition  of  perma- 
nent rent-earners,  to  make  the  mountains  yield  not  a  tem- 
porary supply,  but  a  perpetual  crop  of  timber. 

2.  The  extraction  of  coal  and  other  mineral  deposits  re- 
duces for  future  generations  a  supply  already  limited.  The 
coal  deposits  in  the  earth  have  only  recently  been  drawn 
upon.  A  small  city  like  Ithaca  probably  uses  to-day  a 
greater  quantity  of  coal  than  was  used  in  all  Europe  two 
centuries  ago.  The  large  deposits  of  coal  and  their  early 
development  in  England  long  gave  a  great  advantage  to  Eng- 
lish industry  over  that  of  other  countries.  In  England,  how- 
ever, has  first  been  felt  the  fear  of  the  exhaustion  of  the 
coal-supply.  Professor  Jevons,  in  1861,  sounded  the  note  of 
alarm ;  he  prophesied  that  because  the  coal  deposits  of  Amer- 
ica were  many  times  as  great  as  those  of  England,  industrial 


§  III!    DESTRUCTION  OF  NATURAL  STORES  OF  MATERIALS    89 

supremacy  must  inevitably  pass  to  America.  Already  the 
supremacy  in  coal  and  iron  production  has  passed  to  Amer- 
ica, and  that  in  textiles  soon  will  come.  In  England  the  ac- 
cessible supply  of  coal  is  limited,  deeper  shafts  must  be  sunk, 
and  the  coal  gotten  with  greater  difficulty  and  at  greater  ex- 
pense. Coal  has  risen  in  price  in  England  within  the  last 
few  years,  and  will  continue  to  rise  in  the  future.  The 
coal  deposits  of  America  are  thirty-seven  times  as  great  as 
those  of  England,  but  even  these  will  soon  be  exhausted.  And 
yet  on  the  part  of  all  except  the  coal  trust,  there  appears 
in  America  a  thoughtless  disregard  for  the  future.  Supplies 
of  copper,  iron,  and  lead  in  favored  positions  are  likewise 
limited,  and  are  being  rapidly  centered  in  the  hands  of  great 
companies.  The  increasing  demand  for  these  products  insures 
a  steadily  rising  income  from  their  annual  use.  The  value  of 
the  mines,  being  based  on  the  series  of  incomes  they  will 
yield,  may  increase  while  their  unused  treasures  dwindle 
in  quantity. 

3.     The  exhaustion  of  natural  stores  of  material  is  due  to  Many 
civilization,  but  it  threatens  to  put  an  end  to  industrial  natund 

resources 

progress.  The  savage  does  not  go  deep  enough  to  use  up  are  being 
permanently  the  world  in  which  he  lives.  He  uses  the  fruits  ^JJ2ted 
that  he  finds,  and  those  fruits  are,  almost  without  exception, 
renewed  the  next  year.  The  only  mines  that  were  worked 
out  in  ancient  times  were  gold  and  silver  mines,  while  the 
mines  of  useful  metals  were  touched  but  lightly.  Within  the 
last  century  the  earth's  crust  has  been  exploited  with  start- 
ling rapidity.  Scientific  knowledge  and  mechanical  im- 
provement have  combined  to  unlock  the  storehouses  of  the 
geologic  ages.  At  the  ever-increasing  rate  of  their  use,  many 
important  materials  must  be  exhausted  in  the  not  far  distant 
future.  While  it  is  probable  that  substitutes  will  be  discov- 
ered for  many  of  them,  the  outlook  in  some  directions  has 
little  promise.  To  treat  terminable  incomes,  exhaustible 
sources  of  supply,  as  permanent  sources  of  income,  leads 
alike  to  unsound  theory  and  to  reckless  practice. 


CHAPTER  12 
INCREASE  OF  RENT-BEARERS  AND  OF  RENTS 

§  I.      EFFORTS  OF  MEN  TO  INCREASE  PRODUCTS  AND 
RENT-BEARERS 

Desire  for  1.  While  man  destroys  some  agents  of  production  he  mul- 
age^ts  im-  ^P^es  many  others.  We  have  noted  many  kinds  of  deprecia- 
peis  men  to  tion,  destruction,  and  wearing  out  of  wealth ;  but  the  normal 
thing  in  a  healthy  society  is  an  increase,  on  the  whole,  of 
rent-bearers.  The  increase  of  rents  is  due  to  two  causes : 
changes  in  the  agents  by  which  they  become  more  efficient 
^technically,  or  more  numerous;  and  changes  taking  place 
outside  of  the  agents,  affecting  the  utility  of  the  products. 
The  first  of  these  will  be  considered  in  this  section. 

The  increase  of  the  efficiency  of  agents  is  usually  the  aim 
of  the  individual  producer,  and  thus  is  brought  about  an  in- 
crease of  the  stock  of  wealth.  In  some  cases,  however,  im- 
provements such  as  the  dredging  of  harbors  or  as  the  pro- 
tecting of  forests,  are  made  by  men  collectively  through  the 
agency  of  governments.  Somewhere,  however,  the  desire  for 
these  changes  must  arise  in  the  minds  of  individuals.  In- 
crease of  most  things  involves  "cost"  or  sacrifice,  in  the 
!  psychological  sense ;  that  is,  man  must  strive,  perhaps  suffer, 

I  to  get  a  certain  result.  This  end,  therefore,  must  be  in  itself 
desirable,  and  social  organization  must  be  such  as  to  present 
a  motive  to  the  men  to  make  the  needed  effort. 

improve-  2.     Rent-bearers  may  ~be  increased  in  quantity  and  im- 

adaptetion     Prove^  in  quality  by  the  adaptation  of  natural  resources  to 

of  natural     man 's  purposes.    To  get  food,  men  use  the  tracts  of  land  that 

under  the  conditions  give  the  largest  product.    Other  tracts 

90 


§1]  BY   THE   EFFORTS   OF   MEN  91 

less  fertile,  or  for  some  reason  less  available,  are  ditched, 
tiled,  and  diked,  and  fertilizers  are  carried  up  steep  hill- 
sides to  make  a  soil  upon  the  very  crags.  In  commerce  and 
transportation,  new  ways  are  opened  by  canals,  railroads, 
and  tunnels.  An  isthmian  canal  will  raise  the  efficiency  of 
ships  plying  between  New  York  and  San  Francisco,  enabling 
them  to  carry  a  greater  amount  of  freight  within  a  year. 
The  tolls  will  represent  to  the  users  an  expenditure  only 
partially  offsetting  the  increased  efficiency  of  the  agents  of 
transportation.  By  the  building  of  wharves,  the  dredging 
of  harbors,  and  by  many  other  methods,  indirect  agents  are 
constantly  growing  in  number  and  efficiency. 

3.     Rent-bearers  may  be  increased  by  inventions  and  im-  Machinery 
provements  that  make  machines  stronger,  quicker,  and  bet-  ^ona^p" 
ter.    This  proposition  is  not  logically  different  from  the  pre-  natural 
ceding.     A  machine  is  an  arrangement  of  material  things  r 
through  which   force  may  be   indirectly   applied  to  move 
matter.     No  fast  line  divides  machinery  as  regards  form, 
purpose,  or  cause  of  value,  from  the  artificially  improved 
natural  agents  that  we  have  been  discussing.    Just  as  a  field 
is  drained,  plowed,  and  cultivated  to  fit  it  better  to  yield  a 
crop,  so  is  the  iron  ore  shaped  into  a  form  called  a  machine, 
better  fitted  to  cut,  carve,  and  weave  as  man  wills.    Machines 
are  merely  adaptations  of  natural  resources. 

Increase  in  machinery  may  be  either  in  quality  or  quan-  Bettering 
tity.  The  two  causes  have  in  most  cases  the  same  result.  If  ^f^ of 
the  quality  or  efficiency  of  looms  is  doubled,  it  is  as  if  their 
number  had  grown  in  like  proportion.  In  its  economic  func- 
tion the  beast  of  burden  may  not  illogically  be  classed  with 
inanimate  machines.  The  horses  in  America  have  been  re- 
markably improved  of  recent  years  by  the  importation  of 
thoroughbred  stock  from  Europe.  Ten  or  fifteen  years  ago 
the  number  of  horses  in  the  United  States  was  found  to  have 
decreased,  and  there  was  much  comment  on  this  evidence  of  a 
declining  industry.  It  was  not  at  once  recognized  that  there 
was  embodied  in  horse-flesh  more  horse-power  than  ever  be- 


92 


INCREASE  OF  RENT-BEARERS  AND  OF   RENTS     [CH.  12 


Increasing 
number 
and  better 
grouping  of 
agents 


A  larger 
and  better 
environ- 


fore,  as  a  single  Norman  horse  has  the  strength  of  several 
Mexican  mustangs.  Numbers  alone  are  not  the  measure  of 
efficiency. 

4.  The  increase  of  ivealth  and  the  betterment  of  environ- 
ment go  on  as  well  through  the  increase  in  the  number  of  ap- 
pliances and  through  their  improved  arrangement,  as  through 
changes  in  their  kind.  A  machine  is  an  adjustment  of  va- 
rious natural  agents  to  each  other  so  as  to  make  a  more  effi- 
cient agent,  and  machines  in  turn  may  be  adjusted  as  parts 
of  a  larger  system  of  production.  The  ideal  of  the  modern 
factory  system  is  so  to  arrange  the  machinery  that  no  bit 
of  material  will  make  an  unnecessary  motion.  The  log,  once 
started  through  the  mill,  is  carried  automatically  from  one 
machine  to  another  until  it  emerges  as  a  roll  of  paper  or  as  a 
box  of  tooth-picks,  ready  for  use.  In  an  American  watch- 
factory  one  man  tends  twelve  or  fifteen  automatic  machines. 
A  small  brass  rod  is  fed  automatically  to  the  machine ;  a 
piece  is  cut  off,  is  picked  up  by  a  human-like  metal  hand ;  is 
put  into  a  lathe,  and  shifted  or  held  firmly  while  it  goes 
through  fifteen  or  twenty  processes ;  and  then  is  dropped  into 
a  box  where  it  is  ready  for  the  li assembling"  of  the  watch. 
As  the  machinery  improves,  factories  making  allied  products 
are  grouped  to  make  a  system  still  more  efficient. 

As  the  number  of  agents  increases  they  are  distributed  so 
as  to  be  where  most  useful  to  the  owner.  A  man  having  two 
umbrellas  keeps  one  at  his  office  and  the  other  at  home;  a 
student  having  two  books  of  the  same  kind  keeps  one  at  his 
room  and  the  other  at  the  university;  a  farmer  having  two 
hoes  keeps  one  at  the  barn  and  the  other  in  a  distant  field, 
and  by  this  distribution  the  agents  are  increased  in  efficiency. 

The  aim  of  a  progressive  society  is  to  enlarge  the  environ- 
ment, and  constantly  to  adapt  it  better  to  the  service  of 
wants.  This  is  done  largely  by  mechanical  agents,  which 
capture  the  natural  forces  of  the  world,  put  them  into 
the  right  place  at  the  right  time,  and  make  them  do  the 
right  thing,  or  which  group  and  relate  the  materials  of  the 


§1]  BY   THE  EFFORTS  OF   MEN  93 

world  in  the  right  ways.  Some  of  the  groupings  in  the 
chemical  and  physical  world  that  do  not  fit  man's  purposes 
may  be  made  to  do  so.  The  world  in  this  way  becomes  more 
and  more  a  great  workshop,  better  and  better  adjusted  to 
man's  wants. 

5.     The  betterment  of  the  environment  of  society  in  some 
directions  reduces  the  rent  of  other  parts.    The  wish  of  the 
individual  is  to  raise  his  own  rent-bearers  in  efficiency,  but  reduces  the 
in  doing  that  he  affects  the  agents  owned  and  controlled  o 
by  others.    The  ideal  from  a  social  standpoint  is  to  increase/ 
not  rent  but  the  welfare  of  society,  and  this  is  not  always  the 
ideal  of  individuals  seeking  their  own  interest.    However,  a» 
the  efficiency  of  some  agents  rises,  it  becomes  unnecessary 
and  unprofitable  to  use  the  less  fertile  fields;  they  cease  to 
be  rent-bearers,  and  the  rent  of  the  richer  fields  falls  under 
the  influence  of  the  new  supply  of  products.     Some  inven- 
tions suddenly  increase  the  efficiency  of  free  goods  to  such  a 
degree  that  the  less  efficient  rented  agents  are  thrown  out  of 
use,  and  the  margin  of  utilization  is  moved  to  a  higher  plane 
than  it  was  on  before.     Improved  types  of  machinery  more 
or  less  rapidly  displace  the  older,  less  efficient  types,  which, 
therefore,  more  or  less  completely  lose  their  rent-bearing 
power  long  before  they  are  physically  worn  out.    When  im- 
provements in  agriculture  that  are  applicable  to  a  consider- 
able area  of  land  take  place,  and  the  product  thus  is  increased 
and  cheapened,  the  poorer  land  is  abandoned.     Inventions 
and  improvements  thus  gradually  becoming  common  prop- 
erty, increase  the  free  goods  and  free  uses  not  bearing  rent 
and  open  to  every  one.     One  who  improves  the  quality  of    , 
a  machine  or  the  economy  of  a  process  may  thus  uninten-   / 
tionally  injure  some  of  the  owners  of  low-rent  agents,  while  j 
unintentionally  increasing  the  welfare  of  the  mass  of  men  f 
for  whom  the  margin  of  utilization  is  thus  lifted. 


INCREASE  OF  EENT-BEARERS  AND  OF  RENTS    [CH.  12 


Effect  of 
decrease  of 
the  compet- 
ing agents 


Effect  of 
new  uses 
for  agents 


§  II.      EFFECTS  OF   SOCIAL   CHANGES  IN   RAISING  THE  RENTS   OF 
INDIRECT  AGENTS 

1.  Changes  in  the  number  and  kind  of  competing  re- 
sources may  raise  the  rents  of  particular  agents.    Rents  may 
increase  without  increase  in  the  quantity  or  number  of  a 
particular  group  of  agents  or  without  change  in  their  tech- 
nical efficiency.    As  changes  in  the  conditions  of  society  may 
reduce  rents,  so  other  changes  may  increase  them.     Agents 
of  the  same  kind  may  diminish  in  number,  either  absolutely 
or  relatively.     If  some  of  the  competing  machines  are  de- 
stroyed, the  rents  of  the  machines  that  remain  rise,  while  if 
new  supplies  are  found,  either  in  nature  or  by  improved  in- 
dustrial processes,  the  rents  of  the  older  agents  fall. 

2.  The  discovery  of  new  uses  for  agents  or  for  their 
products  raises  their  rents.    Farm  land  of  the  poorest  kind 
often  is  found  to  contain  valuable  mineral  deposits.     Such 
a  lucky  find  has  lifted  the  mortgage  from  a  farm  in  eastern 
Pennsylvania,  from  which,  in  two  or  three  years,  has  been 
taken  feldspar  exceeding  in  value  the  agricultural  products 
of  the  same  land  in  the  last  fifty  years.     The  discovery  of 
building  stone,  coal,  natural  gas,  or  oil  land  may  make  the 
annual  rent  (or  royalty)   of  land  tenfold  its  former  total 
value.    Fitness  to  produce  nettles  is  not  ordinarily  a  virtue 
in  land,  but  the  discovery  that  certain  fields  produce  a  su- 
perior quality  of  the  nettle  used  for  heckling  cloth,  causes 
them  to  take  on  a  new  value.    A  mineral  spring,  because  of 
the  supposed  or  proved  healing  properties  of  its  waters,  may 
be  as  good  as  a  mine  to  the  owner.    Peculiar  fitness  for  the 
cultivation  of  celery  may  convert  marsh  land  into  a  substan- 
tial source  of  income. 

Social  changes  are  constantly  causing  agents  to  shift  from 
lower  to  higher  uses.  As  population  grows  and  groups  about 
new  industries,  farm  land  is  used  for  residence  lots,  and  in 
turn  for  business  purposes.  Rents  therefore  rise,  and  this 


$ll]  EFFECTS  OF   SOCIAL  CHANGES  95 

rise  is  reflected  in  the  higher  selling  value  of  the  land.  If  a 
new  demand  arises  for  the  product  of  any  machine,  its  rent 
rises,  although  it  may  continue  to  turn  out  the  same  product 
as  measured  by  number  or  quantity.  For,  if  consumers  in- 
crease, a  given  supply  of  agents  becomes  relatively  smaller 
than  before. 

3.  A  rise  in  rents  due  to  social  changes  may  be  relatively  sudden 
permanent  or  temporary.  Business  conditions  sometimes  variationsin 
change  quickly.  An  urgent  demand  for  special  machinery 
raises  quickly  its  rent  and  value.  It  is  said  that  lace  ma- 
chinery is  sometimes  thrown  out  of  use  for  several  years, 
until  a  sudden  renewal  of  the  demand  for  lace  causes  the 
rental  to  equal,  in  two  years,  more  than  the  original  cost.  At 
such  times  the  value  of  factories  increases  greatly,  but  after 
a  few  years  of  prosperity  business  again  collapses.  Such 
prosperous  periods  are  the  opportunity  of  the  business  man 
and  of  the  promoter  to  sell  the  factory  at  its  highest  price. 
Machinery  adapted  only  for  a  special  product  will  not  sell 
as  readily  when  less  needed  for  its  special  use,  as  that  which, 
like  a  turning-lathe,  can  be  used  for  many  purposes ;  but  the 
more  special  the  appliances  needed  for  a  certain  product,  the 
higher,  more  abnormal  will  be  their  temporary  value  when 
they  are  suddenly  needed.  Land  near  the  site  of  an  expo- 
sition takes  on  a  very  great  value  and  again  falls  after  the 
exposition  is  over.  During  the  Boer  War  horses  and  mules 
rose  in  price  in  the  United  States  on  account  of  British  pur- 
chases. ^__ 

A  rise  in  the  value  of  any  agent  at  once  causes  an  attempt  cause 
to  duplicate  it  or  to  find  a  substitute  for  it;  this  attempt,  if  ^^ ^f" 
successful,  puts  a  check  or  sets  a  limit  to  the  rise.    In  this  supply  of 
search  for  new  devices  the  man  who  can  see  most  quickly  and  a«ents 
clearly  has  a  key  to  wealth.    Some  kinds  of  agents,  as  rare 
minerals  or   tools   that   can  be  produced   only   by  highly 
skilled  labor,  cannot  be  increased  rapidly  in  number  and  re- 
main high  in  price  for  a  long  period ;  and  favorably  located 
building  sites  illustrate  the  same  principle.    In  some  cases, 


96 


INCREASE   OF   KENT-BEARERS  AND   OF   RENTS     [CH.  12 


Franchises 
guard  the 
growing 
rents  from 
the  influ- 
ence of 
substitution 


Various 
kinds  of     f 
"unearned 
incre- 
ments ' ' 


it  is  true,  the  demand  may  be  due  to  some  temporary  cause, 
as  in  a  period  of  unsound  land  speculation,  but  usually  the 
growing  value  of  location  is  due  to  a  steady  and  abiding 
change  in  population  or  business. 

4.  Such  public  utilities  as  are  guarded  from  competition 
by  franchises,  often  rise  in  rental  with  increase  in  population. 
The  leading  classes  of  public  utilities  referred  to  are  water- 
works, gasworks,  street-railways,  ferries,  and  wharves.    This 
evidently  is  only  a  special  illustration  of  the  principle  just 
stated,  where  it  is  not  easy  to  find  a  substitute  for  certain 
agents.    Public  franchises  entitle  the  owners  to  special,  some- 
times exclusive,  privileges,  and  protect  them  legally  from 
competition.     Not  all  franchises  are  valuable ;  many  street- 
railways  are  unfortunate  ventures,  the  earnings  being  in- 
sufficient to  pay  expenses,  to  say  nothing  of  interest  on  the 
investment.    But  when  they  pay  greatly,  their  high  value  is 
due  to  the  impossibility  of  competition.     The  cars,  mules, 
dynamos,  steam-engines,  and  other  agents  combined  to  fur- 
nish transportation,  have  a  special  earning  power  because 
other  similar  agents  are  forbidden  to  be  used  in  that  market. 

5.  Industry  abounds  with  cases  of  unearned  increments 
of  value  due  to  accidental  and  social  causes  raising  the  rents 
of  wealth.    The  term  unearned  increment  may  be  defined  as 
an  increase  in  rents  (or  value)  of  agents,  due  to  something 
other  than  the  efforts  or  merits  of  the  owner;  in  fact,  it  is 
that  of  which  we  have  been  speaking.    In  some  cases  power- 
ful or  wealthy  men  can  bring  about  social  changes  in  en- 
tirely legitimate  ways.     The  owner  of  a  large  factory,  mov- 
ing it  into  the  country,  may  buy  up  surrounding  land  and 
found  a  city,  converting  pasture  lands  and  corn-fields  into 
valuable  building  lots.     Again,  social  changes  are  produced 
immorally,  if  not  illegitimately,  when  wealthy  men  or  influ- 
ential politicians  cause  laws  to  be  passed  which  inure  to  their 
advantage  but  which  may  ruin  many  other  citizens. 

In  most  cases,  however,  social  changes  are  impersonally 
caused.    The  individual  owner  who  profits  by  them  is  pow- 


$11]  EFFECTS  OF   SOCIAL   CHANGES  97 

erless  to  affect  the  result.    He  can  only  adapt  his  conduct  in 

some  measure  so  as  to  reap  an  advantage.    He  can  strive  to 

increase  the  number  and  quality  and  to  get  control  of  such 

agents  as  he  foresees  will  yield  higher  rents.    In  making  such     Also  many 

a  forecast  there  is  chance  of  loss  as  well  as  of  gain.     The 

term  " unearned  increment"  has  been  frequently  used  in 

recent  years.     It  is  often  assumed  to  be  a  peculiar  thing, 

sharply  in  contrast  to  other  changes  in  value.    The  foregoing 

hasty  review  may  serve  to  suggest  how  manifold  and  com- 

plex  are  the  instances  of  it,  and  what  an  important  part  it 

plays  in  modern  industry. 


DIVISION  C—  CAPITALIZATION  AND  TIME-VALUE 

CHAPTER  13 
MONEY   AS   A   TOOL   IN   EXCHANGE 

§  I.       ORIGIN  OF  THE  USE  OF   MONEY 

The  con-  1.     The  exchange  of  goods  by  barter  is  extremely  difficult 

siderationof  ^w  most  cases.    Thus  far  we  have  not  considered  the  subiect 

money  can 

no  longer  be  of  money  and  have  so  far  as  possible  avoided  even  the  use  of 


postponed  ^ne  £erm>  Value  in  economics  does  not  depend  on  money,  and 
is  not  necessarily  connected  with  it.  Things  can  be  com- 
pared in  their  utility,  their  importance  to  our  welfare  can  be 
estimated,  without  the  use  of  money.  Many  problems  of 
economics  can  be  discussed  pretty  thoroughly  and  solved 
without  the  use  of  the  word  money  or  any  term  of  similar 
meaning.  But  to-day  it  is  impossible  to  go  very  far  in  the 
discussion  of  economic  questions  without  using  the  concept  of 
money,  which  is  interwoven  with  every  practical  and  theo- 
retical problem  in  economics.  We  have  delayed  to  the  far- 
thest limit  the  formal  recognition  of  the  subject  ;  but  we  are 
now  approaching  the  question  of  capital  and  interest,  and  it 
is  no  longer  possible  to  avoid  a  preliminary  consideration  of 
the  money  concept. 

In  considering  the  problem  of  exchange  of  consumption 
goods,  we  have  assumed  that  it  is  possible  to  weigh  small  dif- 
ferences in  the  marginal  utility  of  goods,  and  that  such 


§1]  ORIGIN  OF  THE  USE   OF   MONEY  99 

differences  have  influence  on  exchange.    Now  in  exchange  by  Exact 
barter  such  a  small  estimate  is  impossible.    In  barter  things  measure~ 

xnent  of 

are  exchanged  directly  for  each  other  in  kind.     If  the  two  utilities  is 
things  do  not  chance  to  coincide  in  value,  the  exchange  can-  notP°sslble 

without 

not  be  completed.  An  equivalent  must  be  found,  or  a  mul-  somemedi- 
tiple,  if  the  marginal  utility  of  two  goods  is  to  be  equalized  J^^e*" 
for  either  party  by  exchange.  As  in  most  cases  this  adjust- 
ment must  be  very  incomplete,  many  exchanges  that  other- 
wise would  be  advantageous  cannot  take  place.  In  the  ear- 
lier stages  of  development,  this  careful  estimate  of  value  is 
not  found.  Children  do  not  make  it.  The  typical  trade  of 
the  small  boy  is  a  ' '  trade  even ' '  •  Johnny  exchanges  his  gin- 
gerbread for  Jimmie's  jack-knife.  It  marks  an  epoch  in  the 
industrial  development  of  the  boy  when  he  begins  to  keep 
store  with  pins,  and  no  longer  trades  candy  for  apples,  but 
both  for  pins,  which  have  become  the  medium  of  exchange 
in  his  boy  world.  He  then  can  express  values  in  much  more 
exact  terms.  In  our  society  most  children  begin  early  to 
grow  familiar  with  this  conception;  but  travelers  find 
some  savage  tribes  still  in  the  earlier  childish  stage  of  de- 
velopment, unable  to  grasp  the  thought  of  a  general  medium 
of  exchange.  vWhen,  through  lack  of  a  medium  of  exchange, 
there  is  a  failure  to  adjust  utilities,  there  is  a  loss  of  the  pos-^- 
sible  advantage  in  each  defeated  exchange.  There  is  a  fur- 
ther waste  of  time  and  of  vain  efforts  to  find  something  that 
will  be  accepted  in  exchange,  and  the  loss  offsets  a  large  part 
of  the  gain  even  when  the  barter  is  effected. 

2.     Some  kind  of  enjoyable  good  in  general  use  comes  to  Money  is 
be  money,  that  is,  to  be  accepted  as  a  medium  of  exchange.  J^*a 
The  difficulties  just  mentioned  are  met  by  the  use  of  a  me-  general 
dium  of  exchange.     A  medium  of  exchange  is  simply  one  ^^f 
kind  of  wealth  which  is  taken,  not  for  itself,  but  to  pass 
along,  in  the  belief  that  it  will  enable  the  taker  to  gratify 
his  wants  and  distribute  his  purchasing  power  in  a  more 
effective  way.    Money  is  an  '  *  invention ' '  in  that  it  is  a  means 
of  exchange  that  came  into  use  independently  in  a  great 


100  MONEY  AS  A  TOOL   IN  EXCHANGE  [CH.  13 

number  of  communities.  It  is  not  an  "invention  in  the  sense 
of  a  mechanical  device  suddenly  hit  upon,  but  rather  in  the 
sense  of  a  social  custom  that  grows  as  its  convenience  is 
tested  by  practice.  Money  is  used,  in  some  degree,  every- 
where except  in  the  most  primitive  tribes.  Historically 
viewed,  the  money  first  used  in  any  community  is  seen  in 
every  case  to  be  a  commodity  capable  of  giving  im- 
mediate gratification,  a  direct  good  in  immediate  use.  It 
then  gradually  comes  to  be  used  as  money,  which  is  an  in- 
direct agent.  Still  later,  when  the  money  habit  is  well  estab- 
lished, a  kind  of  material  having  no  utility  except  as  a  me- 
dium of  exchange  may  come  to  be  used. 

3.  Money  in  its  origin  is  that  good  which  best  unites  the 
qualities  that  make  it  easy  to  sell,  to  carry,  to  know,  to  keep, 
to  divide,  and  unite.  It  is  evident  that  if  some  one  com- 
modity is  gradually  to  take  on  this  use  as  a  medium  of  ex- 
change there  will  be  a  choice ;  some  things  will  be  better  fitted 
than  others.  First,  this  thing  must  have  the  quality  of  sal- 
ability,  or  marketability.  In  the  channels  of  exchange  it 
is  taken  not  because  it  is  wanted  for  itself,  but  because  it 
will  help  to  get  something  else  that  is  wanted.  To  be  sure  of 
a  ready  sale  in  a  primitive  community  it  must,  however,  be 
something  that  is  generally  desired.  Food  and  clothing, 
which  supply  the  fundamental  physical  needs,  are  the  most 
generally  used  and  desired  of  all  goods.  But  they  do  not 
have  the  second  quality  of  a  good  money  material,  that  of 
great  value  in  small  bulk,  transportability.  Food  is  bulky. 
The  carrying  of  a  venison  or  of  a  bag  of  wheat  on  one's 
back  a  short  distance  requires  an  effort  as  great  as  that  for 
the  procuring  of  the  food.  Furs,  however,  have  this  quality 
in  a  high  measure,  united  with  other  qualities  of  money,  as 
is  shown  by  their  general  use  in  the  exchanges  of  northern 
tribes.  Thirdly,  a  thing  must  be  recognizable ;  counterfeits 
must  be  easily  avoided,  and  the  quality  must  be  easy  to  test: 
this  is  the  quality  of  cognizability.  The  love  of  ornament 
is  universal  in  human  societies,  and  gives  value  to  many 


$IJ  ORIGIN   OF   THE   USE  OP   MONEY  101 

materials  combining  'fn  a  high  degree  the  qualities  thus  far 
named.  Fourthly,  the  money  material,  when  taken  in  ex 
change,  must  remain  without  loss  of  quality,  perhaps  for 
long  periods,  until  it  can  be  exchanged  &gain.  Pood  does 
not  answer  to  this  requirement,  being  organic  and  perishable. 
But  some  of  the  metals,  having  value  in  small  bulk,  salabil- 
ity,  cognizability,  and  durability,  step  by  step  displaced 
other  forms  of  money.  Finally,  money  must  be  made  of  a 
material  easy  to  divide  and  unite.  It  is  a  great  convenience 
in  small  transactions  to  be  able  to  represent  a  fractional 
value  by  a  small  coin.  The  money  material  thus,  likewise,  is 
easily  shifted  to  and  from  its  money  use.  It  is  a  very  poor 
money  that  has  not  this  quality,  yet  a  thing  may  serve  for 
money  in  larger  transactions  without  it.  Cattle,  slaves,  and 
land  have  been  thus  used,  although  they  answer  in  a  very 
roughA  way  these  fundamental  requirements  of  the  money 
material. 

4.     The  changing  material  and  industrial  conditions  of  industrial 
society  change  the  kind  of  money  that  is  used.    The  money  ^Sftte 
use,  as  has  just  been  shown,  is  a  resultant  of  a  number  of  convenience 
different  motives  in  men.    Things  that  have  the  highest  claim  ^oneT"1 
to  fitness  for  money  with  a  people  at  one  stage  of  develop-  forms 
ment  would  have  a  low  claim  at  another.    As  each  of  these 
stages  is  passed,  the  thing  used  as  money  either  increases  or 
decreases  in  its  fitness.     The  final  choice  depends  on  the  re- 
sultant of  all  the  advantages.     The  use  of  a  material  may 
become  more  general  or  less  so.    Shells  used  for  ornament  in 
poor  communities  cease  to  be  so  used  in  a  higher  state  of  ad- 
vancement, and  thus  their  salability  ceases.     Furs,  used  at 
some  stage  of  development  as  money  in  all  northern  climes, 
cease  to  be  generally  marketable  when  the  fur-bearing  ani- 
mals are  nearly  killed  off  and  the  fur  trade  declines.     To- 
bacco was  at  one  time  in  Virginia  a  great  staple.    Merchants 
were  always  ready  to  take  it,  and  its  market  price  was  known 
by  all ;  but  as  it  ceased  to  be  the  almost  exclusive  product  of 
the  province,  it  lost  the  knowableness  and  marketability  it 


102 


MONEY  AS  A  TOOL  IN  EXCHANGE 


[OH.  n 


The  proved 


veras 


had  before.  In  agricultural  and  pastoral  communities  where 
every  one  "ha*  da  share  in  the  pasture,  cattle  were  a  fairly  con- 
venient form  of  'money,  but  to-day  would  be  a  most  incon- 
venient -one  ;  k  city  merchant  exchanging  goods  for  Poland 
China  pigs  and  Texas  steers  would  envy  the  proverbial  owner 
of  a  white  elephant. 

The  value  of  the  money  material  may  fall  so  greatly  as  a 
resu^  °^  greater  production,  as  in  the  case  of  iron,  tin, 
copper,  that  it  becomes  unsuitable.  Again,  as  wealth  grows, 
as  exchanges  increase,  as  the  use  of  money  develops,  as  com- 
merce extends  to  more  distant  lands,  the  heavier,  less  pre- 
cious metals  fail  to  serve  the  money  need,  especially  in  the 
larger  transactions.  Thus,  in  a  sense,  different  commodities 
compete,  each  trying  to  prove  its  fitness  to  be  a  medium  of 
exchange  ;  but  only  one,  or  two,  or  three  at  the  most,  can  at 
one  time  hold  such  a  place.  Silver  and  gold,  step  by  step, 
often  making  little  progress  in  a  century,  have  displaced 
other  commodities,  and  are  the  staple  and  dominant  forms 
of  money  in  the  world  to-day.  Every  community  has  wit- 
nessed some  stage  of  this  evolution.  Now  nations  are  di- 
vided into  two  great  groups,  silver-  and  gold-using,  in  accord- 
ance with  the  metals  they  use  as  standards.  The  gold-using 
countries  are  the  most  advanced  industrially,  requiring  the 
most  valuable  money  metal.  Many  countries  have  passed 
in  the  last  century  from  the  silver  to  the  gold  standard, 
and  in  an  intermediate  period  have  tried  to  use  both 
standards.  The  Asiatic  and  South  American  countries 
mainly  use  silver,  while  most  of  those  in  North  America  and 
Europe  use  gold. 

While  industrial  changes  thus  affect  the  choice  of  money, 
in  turn  money  reacts  upon  the  other  industrial  conditions. 
If  a  new  and  more  convenient  material  is  found,  or  the 
value  of  the  money  metal  changes  to  a  degree  that  affects 
the  generalness  of  its  use,  industry  is  greatly  affected. 
The  discovery  of  mines  in  America  brought  into  Europe,  in 
the  sixteenth  century,  a  great  supply  of  the  precious  metals, 
and  this  change  in  the  use  of  money  reacted  powerfully  on 


§11]  NATURE   OF   THE   USE   OF   MONEY  103 

industry.  Money  being  itself  one  of  the  most  important  of 
the  industrial  conditions,  is  affected  by  and  in  turn  affects 
all  others. 


§  II.      NATURE   OF    THE   USE   OF    MONEY 

1.     Money  in  all  its  money  uses  is  an  indirect  agent,  to  be  Money  is  an 
judged  just  as  other  indirect  agents  are.     The  key  to  this^g^cta 
section  is  the  thought  that  the  function  of  money  is  to  serve  jtooi  to  effect 
as  an  indirect  agent.    Money  is  often,  by  a  figure  of  speech,  exchanges 
called  a  tool.     Literally  a  tool  is  a  bit  of  material  which, 
taken  in  the  hand,  is  used  to  apply  force  to  other  things,  to 
shape  them  or  move  them.     Figuratively,  this  is  just  what 
money  does.     A  man  takes  it  in  his  hand  not  to  get  enjoy- 
ment out  of  it,  but  to  apply  force,  to  move  something,  and 
that  which  he  moves  is  the  other  commodity.    Adam  Smith 
aptly  likened  money  to  the  road  and  wagons  that  transport 
goods,  thus  gratifying  wants  by  putting  things  into  a  more 
convenient  place.     Money  is  only  one  of  a  multitude  of 
forms  of  wealth.    It  is  not  even  the  most  " valuable";  it  has 
value  just  as  other  indirect  agents  have.    The  loss  caused  by 
taking  away  an  indirect  agent  entirely  is  greater  than  the  ^ 
benefit  usually  attributed  to  it.>    Its  utility  in  the  extremest 
conditions  is  greater  than  its  marginal  utility  under  ordi- 
nary conditions.     Food  is  not  credited  in  the  market  with 
enormous  value,  but  if  starvation  threatened,  all  else  would 
be  given  for  food.    In  a  like  manner,  each  individual  values 
money  according  to  the  importance  of  the  marginal  service 
it  renders,  but  the  marginal  service  is  far  from  measuring 
the   loss   that   would   be    caused   by   the    entire    disuse    of  ^/ 
money.     In  a  society  without  money,  industrial  processes 
would  be  very  different,  and  exchange  would  be  hampered 
in  almost  inconceivable  ways.     It  is  true,  therefore,  that 
money  is  an  economic  factor  of  high  importance,  but  it  is 
not  so  indispensable  as  many  other  factors  to  which  far  less 
value  is  attributed. 

A  poor  community  has  little  money  because  it  cannot  af- 


104 


MONEY  AS  A   TOOL  IN  EXCHANGE 


[CH.  13 


Why  a  poor 
community 
lacks  money 


ford  more ;  it  gets  along  with  less  money  than  is  convenient 
just  as  it  gets  along  with  fewer  indirect  agents  of  every  other 
kind  than  it  could  use.  Pioneers  in  a  poor  community 
where  the  average  wealth  is  low,  cannot  afford  to  keep  a 
large  number  of  wagons,,  plows,  good  roads,  or  school-houses. 
If  the  community  were  wealthy  enough  it  would  have  more 
of  these  and  of  other  things,  and  great  as  is  the  convenience 
of  money,  poorer  communities  have  to  do  with  little  of  it. 
It  is,  therefore,  a  confusion  of  cause  and  effect  for  poor  com- 
munities to  imagine  that  their  poverty  is  due  to  lack  of 
money. 

2.  Out  of  its  use  as  a  medium  of  exchange  comes  the  use 
of  money  as  a  common  denominator  of  values.    Money  serves 
as  a  "  common  denominator, ' '  for,  as  all  other  things  can  be 
expressed  in  terms  of  money,  through  it  the  value  of  other 
things  can  be  compared.     The  other  things  can  be  expressed 
in  money  because   they  are   constantly   exchanged   for  it. 
All  things  being  compared  with  money,  can  in  turn  be  com- 
pared with  each  other.    Some  consider  this  service  as  a  com- 
mon denominator  to  be  the  primary  and  most  important 
function  of  money.    Sometimes  a  money  of  account  is  found, 
which  is  not  in  use  as  a  medium  of  exchange.     Cattle  and 
slaves  have  served  as  money  of  account  while  not  used  as  a 
medium  of  exchange  in  larger  transactions.     Money  of  ac- 
count  is   used,    as   the   shilling   in   New  York,   which   for 
a    century    has    not    been    in    use    at    all    as    a    medium 
of  exchange.     It  is,   however,   only   apparently   a   denom- 
inator   of    value;     the    shilling    represents    five     fourths 
of  ten  cents.    The  actual  standard  is  the  dollar ;  the  shilling 
is  only  a  habitual  form  of  speech  and  is  mentally  reduced  to 
terms  of  the  money  in  use.    A  decimal  system  is  a  great  con- 
venience in  the  use  of  money  as  a  common  denominator,  but 
not  indispensable.    It  is  a  striking  fact  that  England,  until  a 
few  years  ago  the  greatest  industrial  nation,  still  uses  a 
money  unit  requiring  cumbrous  calculations. 

3.  Other  uses  of  money  are  as  a  storehouse  of  saving 


THE   VALUE   OF   TYPICAL  MONEY  105 

and  as  a  standard  of  deferred  payments.     These  uses  grow  Money  used 
out  of  those  before  mentioned.     The  standard  of  deferred  asastore- 

house  for 

payments  is  the  unit  of  value  in  which  debts  are  agreed  to  be  saving 
paid  later.  It  is  evidently  most  convenient,  and  therefore  al- 
most inevitable,  that  the  common  denominator  in  which  all 
values  are  expressed  from  day  to  day  should  continue  to  be 
taken  as  the  value  unit  when  the  completion  of  the  exchange 
is  delayed  a  day,  a  month,  or  a  year.  This  will  be  more  fully 
discussed  at  a  later  stage  of  our  study. 

The  use  of  money  as  a  storehouse  of  saving  was  more  com- 
mon formerly  than  it  is  now,  when  better  ways  than  the 
hoarding  of  money  are  found  for  "  laying  up  for  a 
rainy  day."  In  some  measure,  however,  money  is  hourly 
serving  this  use,  which  is  still  an  important  one.  Money 
kept  to  be  used  to-morrow  or  five  years  hence  is  a 
storehouse  of  value  for  twenty-four  hours  or  for  five  years. 
In  either  case  it  is  being  kept  to  complete  at  a  later  time  its 
use  as  a  medium  of  exchange.  A  thing  ceases  to  be  money, 
logically  viewed,  the  moment  its  owner  keeps  it  without  the 
purpose  that  it  shall  be  spent  ultimately.  The  typical  miser 
is  a  man  who  has  lost  his  reason  as  regards  the  money  use. 
Money  must  be  deemed,  therefore,  to  perform  the  same  es- 
sential service  as  a  storehouse  of  saving  that  it  does  as  a 
medium  of  exchange.  In  either  case  it  is  to  be  kept  only  to 
the  moment  when  it  will  afford  the  maximum  of  pleasure. 


§  III.      THE  VALUE  OF  TYPICAL  MONEY 

1.  The  money  use,  historically  considered,  is  a  new  use 
added  to  a  good,  and  increases  the  demand  for  that  good. 
The  history  of  any  particular  kind  of  money  may  be  traced 
back  to  a  point  where  it  was  not  money,  since  which  the 
money  use  has  been  added  gradually  to  the  other  uses.  The 
value  of  the  material  later  to  become  money  is  determined,  as 
is  that  of  any  good,  according  to  its  marginal  utility  in  all 
possible  applications.  No  new  theory  is  required  to  explain 


106 


MONEY  AS  A   TOOL  IN   EXCHANGE 


[CH.  13 


The  other 
uses  con- 
tinue, 
slightly 
modified  by 
the  money 
use 


/ 


Money 
yields  a 
series  of 
rents  which 
are  the  basis 
of  its  value 


the  value  of  this  same  commodity  as  it  gradually  acquires  the 
added  use  of  a  medium  of  exchange.  The  new  use  influences 
demand  for  the  thing  just  as  do  the  other  uses.  What  is  here 
said  must  be  understood  as  applying  to  typical  money,  which 
is  at  the  same  time  a  commodity  having  other  uses.  Other 
things  that  are  not  typical  money  come  later  to  be  used  as 
money,  under  legal  regulations. 

2.  A  good  thai  comes  to  be  used  as  money  continues  to 
have  a  commodity  use  along  with  the  money  use.     When  a 
thing  is  wanted  for  some  quality  that  gives  immediate  grat- 
ification to  the  user,  the  explanation  of  its  value  is  simple. 
Ornaments,  shells,  feathers,  food  can  be  seen  to  have  a  direct 
want-gratifying  power.    The  money  use  is  one  that  works  no 
physical  or  visible  change  in  goods,  and  to  many  minds  it 
appears  so  different  from  other  utilities  that   it  remains 
quite  mysterious  and  incomprehensible.     To  persons  accus- 
tomed to  thinking  on  problems  of  value,  this  case  appears 
to  be  no  more  difficult  than  that  of  anything  else  having  two 
or  more  uses.     Cows  are  used  for  milk,  for  meat,  and  as 
beasts  of  burden.    Each  of  these  uses  is  logically  independent 
as  a  cause  of  value,  yet  all  are  mutually  related,  the  values 
of  cattle  being  determined  by  the  consideration  of  all  their 
uses  united  into  one  scale  of  diminishing  utility. 

3.  The  uses  of  money  make  it  a  rent-bearing  form  of 
wealth.  ./The  rent  that  money  yields  is  in  the  form  of  conve- 
nience and  economy.    This  is  sometimes  rendered  directly  as 
psychic  income,  as  in  enabling  the  traveler  to  buy  his  dinner, 
for  the  money  thus  yields  gratification  just  as  does  the  car- 
riage in  which  he  rides.     One  may  go  for  a  day  to  the  sea- 
shore without  a  parasol  and  suffer  from  heat,  or  without 
money  and  suffer  from  hunger.    In  every  case  where  money 
is  retained  for  a  time  in  possession,  there  is  expected  from  it 
a  usufruct  as  great  as,  or  greater  than,  can  be  secured  from 
anything  else  for  which  it  can  be  exchanged.     This  usu- 
fruct is  a  net  surplus,  or  income,  yielded  by  a  sum  of  money 
undiminished  in  amount  up  to  the  moment  it  is  spent,  but 


§111]  THE  VALUE   OF   TYPICAL  MONEY  107 

meantime  increasing  in  the  gratification  it  will  help  to  se- 
cure.)  In  many  cases  in  practical  business  money  yields 
gratification  only  indirectly,  as  the  objective  contract  rent 
received  as  interest  for  borrowed  money  in  business  uses, 
or  as  economic  rent  when  the  use  of  money  in  business  enables 
one  to  secure  a  larger  income.  Because  money  yields  a 
rent  men  make  the  sacrifice  involved  in  keeping  a  stock  of 
it  on  hand.  On  this  rent  is  based  that  part  of  the  value  of 
money  that  is  derived  from  its  money  use.  As  the  use  of 
money  as  a  standard  of  deferred  payment,  or  basis  of  com- 
mercial obligations,  does  not  require  that  it  be  owned  by  the 
parties  writing  the  contract,  this  use  of  money  is  a  free 
good,  a  sort  of  social  by-product  of  the  medium  of  exchange. 
When  money  is  in  use  in  a  community,  any  person  may 
draw  up  contracts  in  terms  of  money,  borrowing  and  lend- 
ing, buying  and  selling  wealth,  later  to  be  repaid  in  other 
wealth  or  services  expressed  in  the  circulating  medium. 

4.  Money  may  be  defined  as  a  generally  accepted  material  The  general 
means  of  payment  and  medium  of  exchange.  This,  its  £^n°f  is 
primary  and  essential  function,  may  appear  to  be  less  im-  character- 
portant  as  new  modes  of  balancing  accounts  of  wealth  are 
devised.  But  its  functions  as  a  common  denominator  of 
values  and  as  a  standard  of  deferred  payment  are  increas- 
ingly important  in  an  advancing  society.  It  is  this  expres- 
sion of  the  value  of  all  other  things  in  terms  of  money 
which  may  well  be  deemed  the  essential  characteristic  of  the 
capitalistic  age.  In  earlier  periods  wealth  was  thought  of 
and  expressed  in  concrete  terms;  now  it  is  expressed  in 
money.  The  general  use  of  money  affects  men's  ways  of 
looking  at  wealth  and  speaking  of  it.  Without  appreciating 
the  nature  and  function  of  money,  it  is  impossible  to  grasp 
the  significance  of  capital  in  modern  industry,  the  consid- 
eration of  which  we  are  now  to  enter  upon. 


CHAPTER  14 

THE  MONEY  ECONOMY  AND  THE  CONCEPT 
OF  CAPITAL 


§  I.       THE   BARTER   ECONOMY   AND   ITS   DECLINE 

1.  The  use  of  money  prevails  in  very  different  degrees 
in  various  parts  of  the  United  States.  The  members  of  this 
class,  representing  nearly  every  state  and  territory  in  tfie 
Union,  have  lived  amid  very  diverse  industrial  con- 
ditions. Some  know  best  the  country  where  conditions  are 
similar  to  those  of  a  hundred  years  ago;  some,  the  villages 
where  may  be  seen  the  handicrafts  and  the  small  general 
store.  Others  know  better  the  cities  with  their  varied  indus- 
tries; while  doubtless  still  others,  through  family  relations, 
know  of  the  methods  of  great  wholesale  business,  perhaps 
even  of  the  larger  commerce  and  foreign  trade.  Methods  dif- 
fer in  the  different  lines  of  business,  and  according  as  a  man 
is  a  farmer,  a  merchant,  or  a  banker,  he  has  different  ideas  as 
to  the  use  of  money  and  of  the  part  it  glays  in  modern  in- 
dustry. You  come  to  this  study  with  different  experiences 
and  preconceptions;  as  a  result  every  statement  produces 
a  somewhat  different  impression  on  each  of  you.  This  is 
true  in  general  of  the  statements  made  in  political  economy ; 
but  it  is  most  strikingly  true  in  the  discussions  of  money.  A 
city  boy  rarely  sees  a  case  of  barter ;  whereas  in  many  parts 
of  the  West  and  Southwest,  and  in  the  mountainous  districts 
of  the  East,  a  large  part  of  the  business  is  carried  on  in  this 
way.  Town  and  city  in  New  York  state  differ  in  this  respect, 
but  hardly  more  than  do  the  rural  districts  of  the  different 

108 


§1]  THE  BARTER  ECONOMY   AND   ITS  DECLINE  109 

sections  of  our  country.  Banks  are  very  numerous  in  the 
East,  are  few  in  the  Northwest,  and  still  fewer  in  the  South. 
Men  can  understand  each  other  better  in  a  discussion  if  they 
are  conscious  of  the  fact  that  they  do  not  instinctively  take 
the  same  point  of  view. 

2.  The  extent  to  which,  on  an  average,  money  is  used  in  countries 
different  countries  of  the  world,  differs  widely.     Statements  ^druseof 
in  political  economy  must  be  guarded;  few  of  them  can  be  money 
taken  as  universally  true.     As  the  different  parts  of  one 
country  may  be  contrasted,  so  may  the  different  countries. 

The  use  of  money  in  Siberia  would  be  much  less  than  that  in 
Moscow  and  St.  Petersburg,  and  again  the  average  use  in 
Western  Russia  is  doubtless  less  than  that  in  Austria.  In 
Austria  the  money  use  is  less  developed  than  in  Germany. 
While  there  is  now  little  difference  between  Germany  and 
France  in  this  respect,  France  for  a  long  time  was  the  more 
developed  industrially  and  made  greater  use  of  money. 

There  is  greater  use  of  money  in  the  cities  of  the  outlying 
countries  than  in  the  rural  districts.  In  the  cities  of  Mexico 
banks  and  credit  agencies  are  employed  as  in  the  American 
cities.  The  rural  districts  are  more  backward  and  make  far 
less  use  of  money  than  is  the  case  in  the  United  States.  The 
great  ports  of  China  are  provided  with  all  the  facilities  of 
modern  banking.  In  the  great  cities  of  India  one  can  get 
a  bank  draft  that  will  be  paid  in  any  part  of  the  world.  But 
go  a  very  little  way  out  of  the  cities  of  China  and  India, 
and  conditions  greatly  change;  money  is  far  less  used  and 
principally  as  a  storehouse  of  saving. 

3.  In  a  historical  view  the  European  nations  are  seen  slight  use 
to  begin  with  a  barter  economy  and  to  pass  through  great  ^Sie 
changes  as  regards  the  use  of  money.    Here  the  view  shifts  Ages 
from  a  comparison  of  different  nations  at  the  same  moment 

to  a  comparison  of  the  same  nation  through  a  period  of 
centuries.  To  understand,  even  in  a  measure,  what  is  about 
them  men  must  know  out  of  what  it  grows.  In  the  early 
Middle  Ages  money  was  used  chiefly  in  cities,  and  there 


110 


THE  CONCEPT   OF  CAPITAL 


[OH.  14 


only  to  a  limited  extent.  Almost  universally  a  "  barter 
economy  "  prevailed,  or,  as  it  has  been  called,  a  "  natural 
economy,"  a  term  taken  from  the  German  "  Naturalien," 
which  means  natural  products,  enjoyable  things,  as  opposed 
to  money.  Natural  economy,  therefore,  means  that  condi- 
tion of  society  in  which  things  are  exchanged  in  kind.  In  the 
Middle  Ages  land  was  the  great  and  dominant  form  of 
wealth.  The  prince  himself  was  dependent  on  land  for  his 
income.  The  conquering  chief  or  invader  took  possession 
of  the  land  and  parceled  it  out  to  his  followers,  and  they  in 
turn  to  their  vassals.  The  income  of  the  rulers  was  in  the 
form  of  ''Naturalien"  (wheat,  chickens,  eggs),  the  kind 
and  amount  of  which  was  fixed  by  contract  or  by  immemorial 
usage.  The  landlord  had  land  as  his  wealth  and  income- 
getter;  the  tenant  received  the  use  of  the  land  in  payment 
for  his  labor. 

The  condition  of  the  serf  appears  to  have  been,  under 
these  circumstances,  inevitably  connected  with  the  "  barter 
economy  "  as  applied  to  the  renting  of  land.  A  farm  can- 
not be  moved,  and  in  medieval  conditions  its  products  mainly 
had  to  be  used  on  the  spot.  If  the  serf  was  to  use  and  enjoy 
the  land,  he  had  to  stay  upon  it.  Having  no  money  he  had  to 
pay  in  labor  or  in  products,  for  its  usufruct.  In  those  times 
the  powerful  man,  politically,  was  also  a  wealthy  man  whose 
wealth  consisted  of  landed  estates.  Between  the  landlord  and 
the  serf  existed  a  lasting  relation,  inherited  rather  than 
voluntary,  but  similar  in  its  conditions  to  the  renting  con- 
tract. The  villein  had  the  use  of  the  stock,  pastures,  fields, 
woodlands,  provided  he  kept  them  undiminished  and  unde- 
stroyed  to  transmit  to  his  children.  Under  such  conditions 
there  was  great  fixity  of  economic  relations.  While  in  some 
respects  this  was  a  happy  condition,  it  had  its  disadvantages. 
The  renting  contract,  in  connection  with  a  fixed  rotation  of 
crops  and  some  communal  modes  of  cultivation,  hindered 
improvements.  The  more  intelligent  cultivator  could  not 
change  his  methods  for  the  better.  It  may  be  seen  not  only 


§IJ  THE  BARTER  ECONOMY  AND  ITS  DECLINE  111 

that  the  use  of  money  on  a  medieval  manor  was  slight,  but 
that  the  conditions  for  the  growth  of  the  money  habit  were 
most  unfavorable.  The  terms  of  agricultural  contracts,  the 
modes  of  speech,  the  habits  and  thought  of  the  mass  of  the 
people,  were  therefore  determined  by  the  conditions  of  the 
barter  economy.  A  change  in  these  respects  was  slowly 
worked  by  forces  originating  outside,  in  a  very  different 
industrial  environment. 

4.     With  the  growth  of  cities  developed  a  new  class  of  contrast  be- 
wealthy  men  and  a  new  view  of  wealth.     The  student  of  tweeacrty 
history  knows  of  the  conflict  that  grew  up  during  the  Middle  feudal  es? 


Ages  between  the  cities  and  the  landed  aristocracy.  It 
found  its  cause  in  economic  conditions.  There  were  obvious  Ages 
differences  between  the  wealth  of  the  feudal  landlords,  and 
the  wealth  that  grew  up  in  cities.  One  must  be  used  mostly 
on  the  spot,  the  other  can  be  moved.  The  fruits  of  one  are 
perishable  for  the  most  part;  the  fruits  of  the  other  can 
be  kept  for  a  longer  period.  The  methods  of  agriculture 
are  exceptionally  stable;  production  by  handicraftsmen  is 
dependent  on  the  peculiar  skill  of  the  workman,  giving 
greater  room  for  invention  and  a  premium  on  skill.  The  one 
industry  may  be  carried  on  by  servile  labor;  the  other 
can  be  efficiently  followed  only  by  free  workers  having  the 
ambition  to  excel. 

The  use  of  money  grew  up  in  the  city.     The  density  of  Money  thus 
population  made  it   easy,   the   growth   of  wealth  made   it  moreused 

in  city  trade 

possible,  and  the  nature  of  the  exchanges  made  it  necessary. 
Whereas  the  relation  of  landlord  and  serf  under  the  renting 
contract  continues  from  year  to  year,  the  relation  of  the 
buyer  and  seller  of  shoes,  hats,  etc.,  in  the  city,  is  temporary, 
these  things  forming  only  a  part  of  man's  economic  needs. 
Barter  with  a  particular  individual  is  much  more  incon- 
venient if  exchange  is  only  occasional  than  where  the 
contract  is  a  continuing  one,  and  there  is  an  annual  balancing 
and  settlement  of  accounts.  So,  as  city  industry  and  com- 
merce firrew  the  use  of  money  increased,  both  in  small 


112 


THE  CONCEPT   OF   CAPITAL 


[CH.  14 


neighborhood  trade  and  in  the  larger  transactions  with  dis- 
tant countries;  and  thus  the  business  methods  of  the  cities 
grew  into  sharper  contrast  with  those  of  the  rural  districts. 

5.  The  loan  and  hire  of  wealth  in  medieval  cities  came 
to  be  expressed  as  a  money  loan.  The  loan  of  money  and 
of  other  wealth  expressed  in  terms  of  money,  began  in  the 
cities.  The  use  of  money  and  the  expression  of  the  value 
of  things  in  terms  of  money  was  common  there  throughout 
the  Middle  Ages.  Moreover,  as  the  movable  forms  of  wealth 
multiplied,  the  agreement  to  return  borrowed  wealth  in  kind 
became  impossible  in  cities;  the  loan  in  terms  of  money  be- 
came the  only  practicable  thing.  A  merchant  embarking  on 
a  trading  expedition  must  have  such  a  number  and  variety 
of  goods,  that  he  finds  it  both  very  difficult  to  rent  them 
and  wasteful  in  time  to  enumerate  them  and  return  them  in 
like  kind.  It  therefore  became  usual  to  make  a  loan  either  of 
the  things  expressed  in  terms  of  money,  or  of  money  with 
which  to  buy  the  things,  thereby  reducing  to  a  single,  simple, 
easily  interpreted  contract,  the  indebtedness  which  the  bor- 
rowing of  a  thousand  different  things  occasioned. 

Such  a  contract  differed  not  in  economic  purpose,  but  only 
in  form  and  terms  of  obligation,  from  the  renting  of  wealth. 
The  church  writers,  however,  got  much  confused  in  regard 
to  the  nature  of  money  loans.  They  did  not  see  that  it  was 
things  which  the  merchant  wished  to  borrow.  They  did  not 
see  that  the  money  loan  was  simply  a  more  convenient  mode 
of  tranferring  the  use  of  wealth  from  one  person  to  another. 
The  moralists  and  lawmakers  of  that  day  said:  Money  is 
unfruitful,  therefore  taking  interest  for  it  is  robbery.  We 
cannot  follow  here  the  controversy  as  to  the  justice  of  interest 
on  money  which  involved  other  ideas  than  those  mentioned, 
but  even  to  the  present  time  traces  of  the  old  fallacy  may  be 
seen  more  or  less  plainly  in  the  economic  theory  as  well  of 
conservative  writers  as  of  the  socialistic  opponents  of  in- 
terest. The  principal  sum  expressed  in  the  loan  contract 
was  called  the  capital  sum,  from  caput,  head,  and  the  amount 


§1]  THE  BARTER   ECONOMY  AND  ITS  DECLINE  113 

paid  for  its  use  was  first  called  usury,  money  for  the  use. 
How  the  word  interest  came  to  take  its  place,  and  the  word 
usury  came  to  mean  excessive  interest  is  one  of  the  most 
interesting  chapters  in  economic  history.  The  term  capital 
then  came  to  be  connected  with  city  wealth,  with  movable 
forms  of  wealth,  with  things  supposed  to  be  peculiarly  ' '  the 
product  of  labor  " ;  and  interest  was  assumed  to  be  connected 
only  with  this  capital.  The  term  rent  on  the  other  hand  was 
connected  especially  with  the  use  of  land..  The  connection 
was  a  historical  accident,  but  it  has  had  an  important  in- 
fluence on  economic  theory. 

6.     The   owners  of  city  wealth  and  of  country  landed  Rivalry  of 
estates  often  were  opposed  as  well  in  social  and  political  as  thecom- 

.  mercial  and 

in  economic  affairs.  Ihe  practical  economic  questions  of  the  land-holding 
Middle  Ages  and  the  practical  political  questions  largely  classesin 
turned  on  these  two  groups  of  interests.  The  men  of  wealth 
in  the  cities,  the  merchants  and  manufacturers,  often  were 
found  opposed  to  the  landed  aristocracy.  This  social  divi- 
sion between  the  commercial  and  agricultural  classes  doubt- 
less helped  to  strengthen  the  prejudgment  as  to  the  nature 
of  the  two  kinds  of  wealth.  Indeed,  in  view  of  the  situation, 
it  may  have  been  in  a  measure  justifiable  and  expedient  to 
contrast  the  thought  of  city  wealth,  which  has  come  to  be 
called  capital,  with  that  of  landed  wealth.  But  even  if  it 
were,  it  is  now  misleading  and  erroneous  to  continue  the  use 
of  such  concepts  in  a  new  country  and  in  our  modern 
conditions. 

Indeed,   for  centuries  the  sharper  features  of  the  con-  Land  con- 
trast have  been  steadily  softened.     The  money  economy  of  ^^wiSe 
the  city  gradually  spread  to  the  rural  districts,  but  never  city  wealth 
entirely  displaced  barter,  which  lingers  everywhere.     Im-  Jj^J^6* 
portant  steps  toward  a  money  economy  were  the  commuting  form 
of  forced  or  customary  labor  of  the  serfs  into  a  money  pay- 
ment to  the  lord,  and  at  the  same  time  the  substitution  of 
money  payments  for  payments  in  kind  (use  of  lands,  speci- 
fied goods,  etc.)  to  the  peasants.    Thus  arose  a  free  peasant 


114  THE  CONCEPT   OF   CAPITAL  [CH.  u 

class  receiving  wages.  But  land  continued  to  be  rented  and 
landed  estates  to  be  hereditary  throughout  Europe.  As  they 
did  not  pass  from  hand  to  hand  as  a  commercial  or  market- 
able form  of  wealth,  their  value  was  rarely,  if  ever,  expressed 
in  terms  of  money  and  as  a  ratio  to  the  rent  they  bore.  The 
result  was  the  fixing  of  the  erroneous  idea  that  agricultural 
wealth  is  essentially  different  in  the  character  of  its  service 
and  yield  from  wealth  used  in  manufactures.  One  phase  of 
the  error  was  the  idea  held  by  the  physiocratic  writers  and  by 
Adam  Smith  that  in  agriculture  "  nature  labors  along  with 
man,"  while  in  manufacture  "  nature  does  nothing,  man 
does  all."  This  view  was  corrected  by  later  critics  (Bu- 
chanan, Ricardo,  and  others),  but  the  main  portion  of  the 
fallacy  persisted  in  the  supposed  contrast  between  the  char- 
acters of  the  services  performed  by  natural  resources  and  by 
artificially  produced  wealth. 

§  II.      THE    CONCEPT    OF    CAPITAL    IN    MODERN   BUSINESS 

Extension          1.     The  development  of  the  use  of  money  and  credit  has 
of  the  use  of  ^  JQ  ^e  expression  of  the  value  of  all  indirect  aqents. 

the  money 

loan  and  of  without  distinction,  in  terms  of  money.  This  is  a  capitalistic 
concert*81  a^6'  ^^e  development  °^  a  class  of  money-lenders  has  led 
to  a  transfer  of  all  sorts  of  wealth  from  owners  to  users  by 
means  of  money.  As  in  medieval  Europe  city  wealth  was 
bought  and  sold,  and  measured  and  expressed,  so  in  twentieth 
century  America  are  the  farm,  the  waterfall,  and  the  mine. 
Every  purchase  with  money  owned  or  borrowed  is  to-day 
called  an  investment  of  capital.  To  invest  means  to  clothe, 
and  an  investment  of  capital  is  clothing  money  in  any  kind 
of  wealth,  whether  it  be  a  ship,  a  factory,  or  a  farm. 

Interest  on  money  is  the  contractual  form  in  which  more 
and  more  the  use  of  wealth  is  paid  for.  The  borrower  does 
not  ask  the  wealthy  man  to  buy  for  him  a  factory  and  to 
rent  it  to  him.  It  is  not  impossible  for  the  transaction  to  take 
that  form;  but  in  practice  it  is  inconvenient.  The  capital 


§11]     THE  CONCEPT   OF  CAPITAL  IN  MODERN  BUSINESS    115 

concept,  the  expression  of  wealth  in  the  form  of  money, 
spreads  over  almost  the  whole  face  of  the  economic  world. 
In  promissory  notes,  mortgages,  capital  stock,  bonds,  and 
many  other  forms,  are  expressed  the  obligations  of  bor- 
rowers bound  to  pay  regularly  a  sum  called  interest  for  the 
use  of  the  multifarious  wealth  they  have  chosen  to  employ. 

2.  Capital  to-day  may  be  defined  as  economic  wealth  ex-  DC 
pressed  in  terms  of  the  general  unit  of  value.  In  economic 
discussion  new  conditions  must  be  recognized  and  an  attempt 
made  to  adapt  definitions  to  the  language  and  needs  of  prac- 
tical life.  By  this  definition,  capital,  at  any  given  moment 
of  time,  includes  all  economic  goods  in  existence,  when  they 
are  thought  of  in  terms  of  their  value.  But  things  have 
different  durations,  some  are  parts  of  the  capital  of  the 
world  only  for  an  instant,  others  for  a  week,  a  month,  or 
years.  Most  capital  is  composed  of  things  durable  in  a  large 
degree. 

It  has  been  seen  above  that  there  is  no  reason  for  keeping 
things  unless  they  will  increase  in  value,  that  is,  unless  a 
rental  is  logically  attributable  to  them.  Everything  kept 
for  a  day,  a  month,  a  year,  is  kept  because  thus  it  will 
continually  give  off  uses  or  by  accumulating  them  it  will 
become  more  useful.  Hence,  wjien  interest  is  defined  as 
the  payment  for  the  use  of  capital,  it  is  connected  with  all 
wealth  that  is  expressed  in  the  capital  form.  In  practical 
business  and  in  theoretical  discussion  this  is  the  idea  of  cap- 
ital that  alone  can  be  consistently  followed.  Capital  is 
value  equivalent  of  a  sum  of  money  ' '  invested, "  * '  clothed  ' ? 
in  forms  of  wealth  purchased  and  exchanged.  Wealth  has 
become  fluid  in  modern  times ;  it  was  crystallized  in  medieval 
times.  Under  the  new  conditions,  wealth,  expressed  in  the 
mobile  form  of  capital,  flows  into  the  most  distant  corners 
of  the  industrial  world. 

3.  Capital  must  not  be  identified  with  money  although  Distinction 
it  is  expressed  in  terms  of  money.  While  money  and  capital  money  and 
are  not  identical,  neither  are  they  opposite  or  mutually  con-  capital 


116  THE  CONCEPT  OF  CAPITAL  [CH.  u 

tradictory.  Money  is  but  one  species  of  the  genus  capital,. 
It  is  a  particularly  durable  form  when  industry  as  a  whole 
is  considered,  a  particularly  fleeting  form  in  the  individual's 
possession,  and  a  particularly  important,  though  not  neces- 
sarily the  most  important,  form  in  its  social  significance. 
The  things  composing  capital  are  concrete  things,  scarce 
forms  of  wealth,  some  of  which  are  yielding  gratification  at 
the  present  moment,  or  are  destined  to  do  so  at  some  future 
moment;  others  of  which  are  not  themselves  giving  direct 
gratification,  but  are  indirect  agents  for  the  gratifying  of 
wants.  To  this  latter  group  belongs  money. 

The  caution  contained  in  this  proposition  may  appear  to 
some  to  be  superfluous,  but  it  is  most  needed.  The  mind  is 
so  prone  to  identify  things  that  are  expressed  currently  by 
the  same  words.  The  ease  with  which  money^and  capitaljare 
thus  confused  has  led  to  various  popular  fallacies  ^m-pLtafili- 
cal  economic  questions. 

contractual  4.  Renting  wealth  and  borrowing  capital  have  the  same 
interest  and  economic  purpose,  but  the  capital  contract  presents  certain 
peculiar  features.  In  the  interest  contract  for  the  loan  of 
capital  the  interest  always  is  and  must  be  expressed  in 
money  ;  the  capital  sum  must  be  expressed  as  value;  and  the 
interest  j^fc&.expresses  the  relation  between  these  two  values. 
In  each  of  these  features  the  interest  contract  is  in  contrast 
with  the  renting  contract.  While  the  rent  itself  may  or  may 
not  be  expressed  in  terms  of  money,  the  value,  of  ..the  rented 
wealth  is  not  so  expressed,  and  there  is  no  rent-rate,  express- 
^  ing  the  relation  between  the  two  values. 

The  wealth        As  here  presented,  the  essence  of  the  capital  concept  is 
concept  and    •     t^     mode  or  facm~X)f  expression  of  wealth,  not  in  the 

the  capital  *>  . 

concept  con-  physical  nature,  the  origin  of  its  value,  or  any  peculiarity  in 


trasted       j  ^Q  k«n(j  Of  weajth  ;  the  content  of  the  concept  is  limited  only 
|  by  man's  thought_pf  wealth,  every  good  becoming  capital 
1  when  it  is  capitalized,  that  is,  when  the  totality  of  its  uses  is 
expressed  as  a  present  sum  of  values.  The  difference  between 
the  wealth  concept  and  the  capital  concept  is  therefore  sub- 


§11]     THE  CONCEPT  OF  CAPITAL  IN  MODERN  BUSINESS    117 

jective,  not  objective;  it  is  a  difference  in  the  mode  of  man's 
thought  regarding  wealth.  The  rent  contract  and  the  inter- 
est contract  are  modes  of  borrowing  and  lending  which  re- 
flect this  difference  of  conception.  In  their  effort  to  express 
more  exactly  to  themselves  and  to  others  the  relative  felt- 
importance  of  their  environment,  men  take  in  turn  different 
points  of  view,  and  use  different  modes  of  expression.  The 
most  developed  and  exact  of  these  devices  for  the  social 
expression  of  valuations,  which  became  possible  only  with  a 
money  economy  and  widened  markets,  is  the  capital  con- 
cept, whose  nature  has  been  analyzed  here. 

Summarizing  the  thought  of  this  chapter,  it  may  be  said  The  capital 
that  the  capital  concept  has  gradually  developed  with  in- 
dustry,  and  is  now  the  most  widely  prevailing  mode  of 
expressing  the  quantity  of  wealth.  It  is  used  in  the  discus- 
sion of  all  the  most  important  problems  of  modern  industry. 
The  questions  of  income  from  wealth,  of  trusts  and  corpora- 
tions, nearly  all  that  is  most  notable  in  the  development  of 
modern  industry,  require  the  use  of  the  capital  concept. 
Yet  (returning  to  the  thought  with  which  this  chapter 
started)  in  many  of  the  outlying  districts  other  modes  of 
looking  upon  wealth  are  employed.  References  to  modern 
industry  must  be  understood  usually  as  applying  to  the  most 
developed  capitalistic  conditions. 


CHAPTER  15 
THE   CAPITALIZATION  OF  ALL  FORMS   OF  RENT 

.    §  I.      THE  PURCHASE  OF  RENT-CHARGES  AS  AN  EXAMPLE  OF 
CAPITALIZATION 

1.  From  the  twelfth  to  the  sixteenth  centuries  the  sale 
and  purchase  of  rent-charges  was  the  most  general  form  of 
borrowing  and  lending  wealth.  A  rent-charge  in  the  Middle 
Ages  was  a  definite  income  that  was  to  be  paid  out  of  the 
rents  of  an  estate,  business  house,  manor,  etc.  The  property 
was  said  to  be  ' '  charged  ' '  with  the  payment  of  that  income, 
and  some  estates  were  passed  on  for  generations  from  father 
to  son  charged  with  a  certain  rent.  It  was  thus  possible 
for  the  owner  of  money  to  buy  a  rent-charge,  either  one  that 
had  been  created  a  generation  before,  or  a  new  one  created 
by  some  landowner  for  the  especial  purpose  of  borrowing 
money  to  go  on  a  crusade  or  of  improving  his  estate  or  of 
investing  in  other  business.  The  transaction  took  this 
form:  the  purchaser  of  the  rent-charge  paid  a  sum  of 
money,  called  the  capital  sum,  and  obtained  in  return  a 
rent-paper  entitling  him  to  receive  permanently  a  given 
income.  The  house  or  land  was  security  for  the  debt.  The 
seller  gave  up  the  right  to  the  rent  as  it  came  in  year  by 
year,  and  received  in  return  a  capital  sum  in  hand.  Gener- 
ally he  had  the  right  to  repay  the  sum  whenever  he  wished 
and  thus  extinguish  the  rent-charge.  Logically  viewed,  the 
purchaser  bought  an  equitable  part  of  the  income,  therefore 
an  equitable  part  of  that  rent-bearing  wealth.  In  effect  it 
was  just  like  a  loan  except  that  the  purchaser  of  the  rent- 

118 


$1]  THE  PURCHASE  OF   RENT-CHARGES  119 

charge  could  not  demand  the  repayment  of  his  money.  He 
could,  however,  sell  the  rent-charge  when  he  wished  to  get 
his  capital  out.  Gradually  it  became  usual  to  sell  and  trans- 
fer rent-papers  just  as  is  done  to-day  with  mortgages  and 
bonds.  Rent-papers  thus  came  in  the  fifteenth  century  to  be 
negotiable  paper  in  somewhat  general  use.  There  was  a 
rise  and  fall  of  the  value  of  the  rent-paper  with  changes 
in  the  demand  for  investment  in  rent-charges  or  with 
changes  in  the  security. 

2.     The  sale  of  rent-charges  grew  out  of  an  industrial  need  Rent- 
of  the  exchange  of  safe  permanent  incomes  for  larger  sums  char«es 
of  wealth.    The  custom  of  the  purchase  of  rent-charges  grew  vement  in- 
up  in  the  cities.    The  increasing  wealth  of  cities,  the  growth  vestment 

in  medieval 

of  commerce  and  enterprise,  caused  rent-charges  to  be  sold  cities 
by  the  owners  of  houses  and  real  estate  in  the  cities,  and  the 
custom  spread  to  the  country.  It  is  an  instance  of  the  way 
income  became  more  fluid  in  the  cities  during  the  Middle 
Ages.  This  kind  of  loan  contrasted  strikingly  in  the  Middle 
Ages  with  those  loans  made  commonly  by  reckless  kings, 
prodigal  nobles,  and  distressed  peasants  to  secure  consump- 
tion goods.  Merchants  needed  large  amounts  of  wealth 
for  their  growing  enterprises,  and  they  felt  that  if  they  could 
get  a  capital  sum  "down  they  could  make  it  earn  more  than 
the  rent-charge.  A  perpetual  income  of  one  hundred  units 
was  therefore  exchanged  for  a  sum  at  the  moment  of  twenty 
or  twenty-five  times  that  amount.  As  the  wealth  of  the 
cities  increased,  there  were  some  men  who  wished  to  retire 
from  active  business,  and  there  were  widows  and  children 
with  property  which  they  could  not  manage  directly.  Such 
persons  either  could  not  afford  to  take  the  risks  of  active 
business,  or  could  not  judge  of  them,  and  they  formed  a 
class  of  lenders  or  investors  seeking  some  safe  income.  Be- 
tween the  two  classes  of  active  merchants  and  capitalist 
lenders,  each  of  whom  saw  his  own  advantage  and  followed 
it,  the  practice  of  buying  and  selling  rent-charges  thus  grew 
up. 


120        THE  CAPITALIZATION  OF  ALL  FORMS  OF  BENT     [CH.  15 


Rent- 
charges 
were  not 
forbidden  by 
the  church 


The  market 
value  of 
rent- 
charges  re- 
flects the 
exchange 
ratio  be- 
tween pres- 
ent and 
future 
money  in- 
comes 


The  practice  was  allowed  by  the  church,  though  interest 
and  the  lending  of  money  were  forbidden.  The  loan  was 
substantially  a  loan  of  capital  and  the  rent-charge  was  sub- 
stantially interest,  but  in  the  eyes  of  the  church  moralists 
there  was  a  marked  difference,  in  that  the  obligation  to  the 
purchaser  of  the  rent-charge  was  secured  by  a  permanent 
and  substantial  form  of  wealth,  and  the  contract  usually 
was  favorable  to  the  borrowers.  In  its  origin  the  practice 
was  not  merely  an  evasion  of  the  law  against  usury,  but  a 
convenient  form  of  contract.  It  doubtless  came,  however, 
to  be  used  as  a  means  of  evading  the  law  of  the  church 
against  usury,  and'  thus  became  an  entering  wedge  for  the 
general  use  of  money  loans. 

3.  Rent-charges  had  a  market-value,  varying  with  time 
and  place,  and  expressed  as  a  number  of  years'  purchase  of 
the  rent-charge.  The  sellers  of  rent-charges  were  influenced 
by  many  motives :  a  lord  wished  to  build  a  castle,  or  go  on  a 
crusade ;  a  farmer  wished  to  improve  his  estate ;  a  merchant 
wished  to  embark  on  larger  ventures.  Opportunities  thus 
opened  in  the  cities  for  men  of  wealth  to  get  a  fixed  income 
for  a  payment  of  ready  money.  In  the  cities,  the  buyers 
seeking  a  fixed  income  would  bid  down,  or  bid  up,  the  value 
of  the  rent-charges,  which  thus  came  to  have  a  quotable 
market  value.  In  time,  greater  and  greater  amounts  were 
paid  by  the  investors  in  return  for  the  guarantee  of  a  given 
income.  In  rural  districts  the  value  of  the  charges  was  low, 
that  is,  the  capital  sum  was  but  ten  or  twelve  times  the  value 
of  the  annual  rent-charge ;  while  in  the  cities  it  rose  to  twenty 
and  even  twenty-five  times  the  annual  rent-charge. 

A  memento  of  this  practice,  probably,  is  the  manner  in 
which  the  price  paid  for  land  is  spoken  of  still  in 
England  and  the  continental  countries  in  a  phrase  quite  un- 
familiar to  American  ears,  as  a  certain  riumber  of  "  years' 
purchase. "  If  an  estate  is  sold  for  twenty  times  the  annual 
net  rental  it  is  said  to  be  sold  at  twenty  "years'  purchase." 
This  does  not  mean  that  the  rental  for  twenty  years  only 


§1]  THE  PURCHASE  OF  EENT-CHAKGES  121 

is  sold,  but  that  the  rental  in  perpetuity  is  sold  for  twenty 
times  the  annual  rent;  that  is,  the  land  is  sold  outright  for 
twenty  years'  rent  paid  at  once.  The  estate  is  looked  upon 
primarily  as  yielding  a  fixed  income;  the  value  of  the  per- 
manent possession  of  the  estate  is  thought  of  as  a  certain 
number  of  times  the  value  of  the  income  secured.  "Years' 
purchase"  means,  therefore,  the  length  of  time  required  for 
the  income  to  amount  to  the  purchasing  price. 

This  attains  the  thought  of  the  present  value  of  the 
estate,  or  capital  sum  in  it,  though  the  capital  sum  is  thought 
of  as  a  multiple  of  the  income,  instead  of  the  income  being 
calculated  as  a  percentage  of  the  capital  value.  Now  at  the 
rate  of  "ten  years'  purchase"  an  investment  of  money  in 
land  affords  an  annual  interest  of  ten  per  cent.,  as  each  year 
the  rental  is  one  tenth  of  the  original  investment;  twelve 
years'  purchase  yields  eight  and  one  third  per  cent.,  twenty 
years'  purchase,  five  per  cent.,  and  twenty-five  years' 
purchase,  four  per  cent.  Increase  in  the  number  of  years' 
purchase  corresponds  to  a  decrease  in  the  rate  of  interest 
which  the  original  investment  of  money,  the  capital  sum,  is 
expected  to  yield.  This  is  equally  true  whether  the  invest- 
ment be  in  the  legal  form  of  a  purchase  of  the  fee-simple  of 
land,  or  in  that  of  the  purchase  of  a  rent-charge.  We  are 
brought  to  this  conclusion:  that  the  present  value  of  the 
rents  in  perpetuity,  of  any  given  wealth,  is  the  capital  value 
of  the  wealth ;  and  that  the  reciprocal  of  the  number  of  years' 
purchase  is  the  rate  of  interest  that  an  investment  is  ex- 
pected to  yield. 

4.     The  sale  of  rent-charges  has  gradually  given  place  to  purchase 
the  modern  form  of  money  loan.    The  conditions  of  the  con-  ^t^r°_ 
tract  in  the  sale  of  rent-charges  were  gradually  changed  for  ge$  gives 
greater  convenience.    When  the  purchaser  (the  lender)  was 
given  the  right  to  require  repayment  of  the  capital  sum  at  tracts 
the  end  of  a  specified  time,  the  transaction  was  brought  still 
closer  to  an  ordinary  loan.     In  this  form,  the  sale  of  rent- 
charges  is  still  found  in  southern  Germany,  but  the  greater 


122     THE  CAPITALIZATION  OF  ALL  FORMS  OF  RENT     [CH,  is 

simplicity  of  the  money  loan,  and  of  the  sale  outright,  has  led 
to  the  almost  total  disuse  of  the  older  form  of  transaction. 

The  purchase  of  rent-charges  was  long  looked  upon  as  a 
very  different  thing  from  the  loan  of  money,  but  to  modern 
eyes  it  is  not,  and  the  old  distinctions  between  the  moralities 
of  the  two  kinds  of  income  appear  now  mainly  quibbles, 
justified  in  a  slight  degree  by  certain  social  facts  of  the  time. 
The  rise  of  industry  led  to  different  ideas  on  the  lending 
of  money ;  the  prejudice  against  it  weakened  in  large  classes 
of  the  population,  especially  in  Protestant  countries,  and  its 
use  rapidly  spread.  Not  until  1830  did  a  decision  of  Rome 
remove  all  disapproval  on  the  part  of  the  church.  Rent- 
charges  are  instructive  now  as  showing  the  mode  in  which 
rents  began  to  be  capitalized  in  earlier  centuries. 

§  II.      CAPITALIZATION    INVOLVED    IN    THE    EVALUATING    OF 
INDIRECT   AGENTS 

1.  The  buying  of  any  indirect  agent  is  practically  the 
purchasing  of  a  <f  rent-charge."  To  account  rationally  for 
the  market  value  of  anything,  its  importance  must  be  traced 
back  to  "gratification."  We  have  examined  and  accepted 
the  proposition  that  if  a  good  is  not  affording  enjoyment  at 
the  present  moment  it  is  kept  because  it  will  yield  a  rent 
until  it  is  used.  If  it  is  never  to  afford  direct  enjoyment, 
if  it  is  never  to  mature  physically  into  the  class  of  enjoyable 
goods,  the  explanation  for  its  value  must  be  found  in  the  fact 
that  it  is  capable  of  yielding  a  series  of  rents  of  enjoyable 
goods.  '  In  the  last  analysis  the  value  of  anything  must  be 
found  in  its  power  of  affording  psychic  income,  a  series  of 
psychic  rents/'  Now  when  such  a  durable  income  is  bought 
outright,  what  is  the  basis  on  which  its  value  is  estimated? 
What  other  than  the  rents  it  will  afford?  Exactly  as  did 
the  purchasers  of  a  medieval  rent-charge,  the  buyer  of  the 
durable  wealth  pays  a  definite  sum  in  return  for  the  right 
to  enjoy  a  series  of  future  rents.  As  was  the  case  with  rent- 


*ll]  EVALUATING  OF   INDIRECT   AGENTS  123 

charges,  however,  the  amount  paid  will  be  less  than  the  full 
matured  value  of  the  rents.  A  long  series,  even  a  perpetual 
series,  may  be  exchanged  for  no  more  than  ten,  twenty,  or 
twenty-five  annual  rents.  While  therefore  the  selling  value 
of  the  good  is  the  sum  of  the  values  of  the  rents,  it  evidently 
is  that  sum  discounted.  Immediately,  when  we  have  reached 
this  point  in  the  reasoning,  our  proposition  must  suggest 
itself  as  self-evidently  true  in  this  form:  the  value  of  any 
good  is  the  sum  of  the  entire  series  of  rents  it  contains, 
discounted,  at  some  rate,  to  their  present  worth/  What 
determines  the  rate  of  discount  is  a  question  that  will  call 
later  for  a  fuller  explanation. 

2.     There  are  two  modes  of  approach  to  the  problem  of  capital 
interest:  one  from  the  side  of  income  (rents) ;  the  other,  from  valueisnot 

primary 

the  side  of  the  Nearer  (capital}.  /The  ra£e  of  interest  ex- 
presses a  relation  between  two  values,  the  value  of  the  income  \/ 
and  the  value  of  the  sum  loaned,  whether  it  consists  of  money 
or  of  other  wealth  expressed  in  terms  of  moneyj  But  which 
of  these  values  is  primary  in  a  study  of  the  causes  of  value  ? 
Which  is  the  base  from  which  the  other  is  derived  by  mul- 
tiplying at  the  rate  expressing  their  ratio?  The  answer  to 
this  question  cannot  be  a  matter  of  indifference  to  the  eco- 
nomic theorist.  Universally  heretofore  the  study  of  interest 
has  been  approached  from  the  side  of  capital.  A  capital  sum 
was  said  to  be  invested  and  to  earn  a  certain  interest,  that  is, 
per  cent.,  of  that  sum.  The  usage  of  speaking  of  the  invest- 
ment of  capital  as  a  sum  given,  and  of  * '  interest  on  capital ' ' 
predisposes  the  mind  to  this  view. 

Bui:  the  approach  from  the  side  of  income  has  been  shown  Expected 
to  be  in  some  important  cases  the  historical  origin  of  the  rate  JJjJ^6 
of  interest,  and  we  need  but  reconsider  reasoning  that  has  and  capital 
gone   before   to   see  that  this   is  the  logical   order  in   all  ,Tfy"aJg,the 
cases.     Rent,  or  income,  is  a  link  in  the  chain  of  value,  purchase" 
connecting    gratification    or    psychic    income,    consumption 
goods,  rent  or  usufruct  value,  and  finally  capital  value.    To 
one  keeping  in  mind  the  logical  cause  of  value,  it  becomes 


124:       THE  CAPITALIZATION  OF  ALL  FORMS  OF  RENT     [CH.  13 

inconceivable  that  capital  value  could  precede  income,  a 
view  possible  only  when  a  fragment  of  the  problem  is  seen. 
This  being  true,  the  mere  mention  of  a  capital  sum  implies 
the  interest  problem,  and  assumes  the  interest  rate.  The 
capital  is  of  that  amount  because  the  anticipated  incomes, 
discounted  at  some  rate,  equal  that  sum.  The  capital  sum 
is  a  certain  number  of  years'  purchase  of  the  series  of  rents 
.  which  can  be  secured  by  the  use  of  wealth  in  various  indus- 
tries. The  owner  of  a  number  of  dollars  (or  of  an  amount 
of  other  wealth  expressed  in  dollars)  has  open  to  him 
various  investments.  The  value  of  any  wealth  is  due  to  the 
possibility  of  deriving  incomes  from  it.  If,  however,  the 
expected  income  fails  to  be  realized,  the  capital  loses  its 
value,  or  it  is  revalued  on  the  basis  of  the  new  rents.  Tfre 
investment  is  then  said  to  be  a  losing  one.  Thus,  at  each  stage 
in  the  valuation  of  capital,  before  it  is  invested  and  at  every 
moment  thereafter  when  the  valuation  is  readjusted  to  the 
rents  realized  or  expected,  rents  are  logically  primary,  the 
source  from  which  the  capital  sum  is  derived. 

The  rate  of       3.     The  capitalization  of  comparatively  safe  permanent 
incomes  from  real  estate  contains  ivithin  itself  all  the  factors 


is  not  fixed  /or  the  independent  determination  of  the  interest  rate,  and 
commerce  s  n0^  ^°  ^e  exP^ne(^  merely  ~by  reference  to  (<the  prevail- 
ing rate  of  interest  "  in  other  investments.  The  value  of 
land  usually  is  explained  simply  as  the  capitalizing  of  its 
rents  at  "  the  prevailing  rate  of  interest/'  The  rate  is 
assumed  to  be  fixed  by  conditions  in  manufacturing  and 
commerce,  and  if  five  per  cent,  can  be  gotten  there  the 
capitalist  would  never  buy  land  unless  investment  in  it 
were  made  equally  attractive.  The  cause  of  the  rate  thus 
is  supposed  to  rest  outside  the  transaction  itself,  the  exchange 
of  land  for  other  capital  seeking  investment.  The  economic 
student  is  safe  in  assuming  always  that  explanations  of  this 
sort  are  fallacious.  The  cause  of  value  in  any  one  exchange 
or  any  one  industry  is  not  thus  to  be  juggled  and  shifted  into 
another  industry.  It  is  true  that  the  values  of  goods  are  so 


$11]  EVALUATING  OF  INDIRECT  AGENTS  125 

wonderfully  interrelated  by  substitution  that  as  the  price 
of  fresh  beef  will  affect  that  of  salt  mackerel,  so  the  capitali- 
zation rate  of  machinery  affects  that  of  land;  but  the  influ- 
ence is  not  from  one  side  only,  it  is  mutual.  When  anything 
has  value,  it  must  have  in  itself  an  independent  cause  of 
value. 

It  can  not  be  otherwise  in  the  particular  problem  of  value  The  ex- 
called  capitalization.     The  first  task  of  scientific  study  is  chan«eof 

A  _  any  present 

to  state  clearly  the  nature  of  the  problem.     In  this  case  it  and  future 
is  seen  to  be  the  exchange  of  a  present  sum  of  wealth  for  J^^^8 
a  series  of  future  rents.    Whenever  there  are  income-bearers  time  dis- 
and  buyers  and  sellers  of  them,  there  are  the  conditions7  ° 
required  for  the  determination  of  the  market  rate  at  which 
those  future   incomes   shall   be   discounted.     Manufactures 
and  commerce  have  no  peculiar  relation  to  this  process.    By 
a  flight  of  scientific  imagination  we  might  assume  that  the 
stock  of  indirect  agents  in  the  world  consisted  only  of  nat- 
ural food  producers,  and  that  this  stock  and  its  yield  were 
absolutely  unchangeable  by  man's  will  or  efforts.     Each 
man  in  such  case  would  have  to  stand  with  hands  tied,  and 
take  the  fruits  as  they  matured.    Even  in  such  a  case  there 
would  be  capitalization  and  a  rate  of  discount  on  future 
rents.     The  fruit-tree   (that  is,  the  whole  future  series  of 
fruits)  would  bear  a  certain  relation  to  one  year's  yield; 
the  field  would  bear  a  certain  relation  to  its  crop.    Wherever 
there  are  buyers  and  sellers  of  more  or  less  durable  agents 
of  it  matters  not  what  kind  or  origin,  there  are  present  the 
elements  and  causes  for  the  fixing  of  a  rate  of  time  discount. 

4.     In  practical   business  may   be  seen  innumerable  in-  Capitaiiza- 
stances  of  the  capitalization  of  both  permanent  and  limited  J^^Q 
series  of  incomes.    The  simplest  case  is  the  capitalization  of  uniform 
an   unvarying   and   supposedly   perpetual   series   of   rents.  ™™.°* 
Whatever  the  rate  of  time  discount  prevailing,  rents  infi- 
nitely distant  become  infinitesimally  small  when  discount  is 
compounded.     The  present  rent  is  worth  most,  next  year's 
less,  and  so  on  in  a  decreasing  series. 


126       THE  CAPITALIZATION  OF  ALL  FORMS  OF  RENT     [CH.  15 


Mode  of 
fixing  the 
rate  of  time 
discount  in 
practical 
business 


But  social  changes  alter  rental  values,  and  so  far  as  these 
changes  are  foreseen,  these  anticipated  or  expected  rents  are 
made  the  basis  for  present  capitalization.  Investors  and 
owners  alike  may  foresee  that  a  piece  of  land  used  only  for 
agriculture  will,  within  a  few  years,  be  taken  up  for  city 
lots,  or  will  be  needed  for  a  factory  or  as  the  site  of  a  rail- 
road station.  The  capitalized  value  would  not  in  this  case 
be  based  upon  a  series  of  uniform  rents  each  of  the  amount 
yielded  annually  now,  but  on  the  progressive  series  expected. 
In  some  cases  the  physical  output  of  an  agent  may  decline 
while  the  price  of  the  product  increases.  Modern  foresters 
foresee  that  the  selling  price  of  the  timber  will  be  greater 
twenty-five  years  from  now  than  it  is  to-day,  and  they  there- 
fore estimate  the  rental  value  of  the  forest  on  the  basis 
of  the  future  price,  thus  justifying  expenditure  that  would 
be  unwise  if  present  prices  were  to  continue. 

Again  the  expected  series  of  incomes  may  be  declining,  as 
the  royalties  (not  typical  rents)  secured  from  mines.  If  the 
income  is  expected  steadily  to  fall,  and  to  disappear  at  the 
end  of  the  twenty-fifth  year,  the  value  of  the  mine  would 
be  the  capitalized  sum  of  a  limited  and  degressive  series 
of  incomes. 

Every  exchange  of  a  durable  agent  involves  an  estimate, 
rough  and  imperfect  it  may  be,  of  that  agent's  future. 
The  practical  men,  however,  who  are  thus  fixing  the  ' '  capital 
value  "  of  goods,  are  usually  only  dimly  conscious  of  the 
logical  nature  of  the  process.  In  fact  the  process  goes  on 
in  a  way  much  less  analytical  and  conscious,  much  more 
empirical,  than  this  analysis  would  indicate.  Most  men 
simply  buy  as  cheap  as  they  can  the  agents  which  at  the  price 
they  believe  will  add  most  to  their  income.  The  future 
changes  are  only  roughly,  not  accurately  estimated.  The 
shrewd  bargainer  is  the  one  who  foresees  more  clearly  than 
his  fellows  the  complex  changes  to  come.  Other  men  blindly 
follow.  The  ability  and  the  inability  to  foresee  such  changes 
make  men  rich  and  poor.  In  all  this  bidding  for  capital 


CAPITALIZATION   IN  MODERN  INDUSTRY  127 

the  logical  basis  of  the  value  is  the  series  of  rents.  When 
the  agent  is  bought  outright,  the  very  concluding  of  the 
bargain  fixes  a  relation  between  the  expected  value  of  the 
income  and  the  value  of  the  capital  invested.  In  other 
words,  the  exchange  of  durable  agents  virtually  wraps  up 
in  them  a  net  income,  which  it  is  expected  will  unfold  year 
by  year  when  rents  mature  and  are  secured.  At  the 
moment  of  the  investment,  the  expected  rents  are  expressed 
as  a  percentage  of  the  capital  sum. 

§  III.      THE    INCREASING    ROLE    OF    CAPITALIZATION    IN    MODERN 

INDUSTRY 

1.  Where   a   system   of   exchange   is   highly   developed,  AS  exchange 
things  are  looked  upon  as  capital  yielding  an  objective  in-  in(*eas<* 
come  rather  than  as  wealth  yielding  immediate  means  of  nonof goods 
enjoyment.     In  the  old  organization  of  industry  most  men  ^^^ 
got  most  of  their  living  from  the  things  they  raised  or  made. 

At  the  present  time  goods  are  gotten  in  the  most  indirect 
ways ;  men  seek  wealth  because  it  will  yield  them  an  objective 
or  money  income,  knowing  that  if  they  can  get  the  income, 
they  can  get  other  things  by  exchange.  In  business 
to-day,  wherever  there  is  a  rental,  it  is  capitalized,  has  a 
market  value,  is  bought  and  sold.  Men  compete  in  the 
purchase  of  income-yielding  agents.  There  is  a  con- 
tinual contest  in  judgment  among  investors  to  secure  the 
largest  rent  for  the  smallest  outlay.  On  the  other  hand,  the 
owners  of  any  rental  strive  to  secure  the  largest  capitaliza- 
tion for  it  that  they'  can.  In  this  market  for  capital  it  is 
money  rents  that  are  exchanged  as  an  indirect  means  of 
arriving  at  gratifications. 

2.  The  issue  of  capital  stock  is  the  putting  of  the  incomes  various 

of  wealth  into  marketable  form.     Stock  companies,  or  cor-  ^0°^er." 

porations,  are  business  enterprises  which  issue  stock,  or  cer-  curitiesput 

tificates  of  a  share  in  their  wealth  and  income.     Doubtless  %££££_ 

the  convenience  of  the  sale  and  transfer  of  invested  capital  able  form 


128       THE  CAPITALIZATION  OF  ALL  FORMS  OF  BENT     [CH.  13 

by  the  use  of  stock,  has  been  one  of  several  reasons  for  the 
large  increase  of  this  form  of  organization  during  the  past 
century.  Originally  the  stock  of  a  company  taken  collec- 
tively represented  all  the  capital  invested,  and  each  share 
entitled  the  owner  to  a  given  portion  of  the  total  income 
earned.  The  shares  were  issued  in  regular  denominations  in 
terms  of  money,  and  this  amount  expressed  on  the  face  of  the 
stock  remained  fixed.  But  as  a  business  proves  more  or  less 
profitable,  the  value  of  a  share  of  its  income  rises  and 
falls  regardless  of  the  original  amount  of  stock  issued.  At 
once  there  is  a  divergence  between  the  nominal  or  face  value 
and  the  market  value  of  the  stock.  The  nominal  value  is 
relatively  permanent,  the  same  year  after  year;  it  may  in- 
crease by  further  issues,  but  rarely  is  it  decreased.  But 
when  stock  is  the  only  form  of  claim  on  the  earnings  that  is 
issued,  the  fluctuations  of  the  market  value  of  the  stock 
record  the  real  value  of  the  business,  that  is,  the  capital 
value  of  the  rents  it  is  expected  to  yield.  But  in  present 
practice  there  are  several  forms  (of  which  stock  is  but  one) 
in  which  an  investor  may  buy  a  share  in  the  earnings  of  a 
business.  Bonds  usually  do  not  give  their  owner  a  vote  in 
the  management  or  make  him  in  the  technical  legal  sense 
a  part  owner  in  the  business.  Bonds  representing  money 
loaned  to  a  company,  and  entitling  their  holder  to  regular 
interest  payments,  are  nearest  in  form  to  the  medieval  rent- 
charge.  Next  stands  preferred  stock,  which  entitles  the 
owners  to  share  first  in  the  dividends,  if  there  are  any;  and 
finally  the  common  stock,  which  gets  a  share  only  when  the 
other  claims  are  satisfied.  By  the  multiplication  and  further 
variation  of  these  readily  salable  claims  on  industrial  in- 
comes, the  needs  and  desires  of  investors  are  met  more  fully 
and  with  greater  precision. 

3.  Men  seek  to  convert  into  marketable  capital  any  in- 
crease  °f  income  in  their  wealth  or  business.  A  man  who 
invests  a  given  capital  sum  in  machines,  buildings,  and  ma- 
terials buys  them,  as  others  do,  at  prices  that  represent  their 


CAPITALIZATION  IN  MODERN   INDUSTRY  129 

usual,  or  market,  earning  power.  If  he  succeeds  excep- 
tionally in  his  business,  he  makes  the  capital  earn  more  than 
the  rents  on  which  it  was  capitalized.  The  same  material 
wealth  becomes  worth  more  because  of  the  reputation  of  his 
products,  and  therefore  the  trade-mark  and  good-will  of  the 
business  can  be  capitalized.  In  this  sense  a  good  name  can 
be  sold,  and  is  at  least  as  much  to  be  desired,  even  in  a 
mercenary  age,  as  great  riches.  Likewise,  social  changes, 
new  needs,  the  growth  of  population,  increase  the  net  income 
of  wealth,  or  the  rents  of  a  business.  The  basis  of  capital 
value  is  income,  and  whatever  be  its  cause,  political  or 
economic,  material  income  can  and  will  be  capitalized  and 
added  to  the  market  value  of  the  privilege,  wealth,  or  in- 
dustry on  which  the  income  is  conditioned. 

Notable  cases  of  this  sort  arise  in  connection  with  public  The  capital- 
franchises.  If  a  street-railway  or  a  gas-company  is  given  the  ^cwses 
exclusive  right  to  operate  in  a  given  locality,  any  income  for  public- 
above  average  interest  on  the  investment  is  capitalized  either 
in  the  higher  price  of  the  stock  or  in  additional  stock  issued 
without  the  addition  of  any  material  to  the  plant.  If  the 
franchise  is  unlimited,  the  income  may  be  capitalized  as 
practically  perpetual;  if  the  franchise  is  limited,  and  is  to 
expire  in  thirty  or  forty  years,  only  the  limited  series  of 
privileged  incomes  can  ordinarily  be  capitalized.  When, 
however,  the  managers  are  able  to  exert  influence  enough 
to  have  the  franchise  extended,  and  the  investors  believe  in 
the  skill  of  the  managers  and  perhaps  in  their  power  to 
bribe  the  legislators,  the  value  of  the  stock  continues  higher 
than  it  could  usually  be  under  a  limited  franchise.  Such 
circumstances  becloud  the  question  whether  the  exceptional 
income  arising  under  the  franchise  should  go  to  the  public 
or  to  the  company.  Granted,  however,  that  the  company  is 
entitled  to  the  income,  the  burden  of  proof  is  on  those  who 
object  to  the  capitalizing  of  the  income  as  is  done  in  every 
other  business. 

4.     The    manipulation    of    dividends    and    the    resulting 


130       THE  CAPITALIZATION  OF  ALL  FORMS  OF  KENT     [CH.  15 


Some  diffi- 
culties in 
the  capital- 
ization of 
corporate 


changes  in  capitalization  open  up  great  opportunities  for  the 
dishonest  increase  of  private  fortunes.  A  great  change 
in  the  market  value  of  stock  is  made  by  a  comparatively  small 
change  in  the  income  it  regularly  affords,  for  if  the  prevail- 
ing rate  of  interest  on  money  loans  is  five  per  cent.,  each 
dollar  of  dividends  is  capitalized  at  $20.  It  might  seem  that 
the  dividend  would  be  declared  if  earned,  otherwise  not. 
The  matter  is  not  so  simple  and  impersonal,  however.  The 
control  of  corporations  is  vested  in  the  hands  of  a  small 
group  of  directors  who  have  both  the  opportunity  and  the 
temptation  to  withhold  dividends  when  they  are  earned,  to 
pay  them  with  borrowed  money  if  unearned,  and  in  either 
case  to  keep  the  stock-holders  and  the  public  in  ignorance  of 
the  real  condition  and  earning  power  of  the  business.  The 
stocks  can,  by  this  manipulation  of  dividends,  be  made  a 
lottery  for  the  legitimate  investor,  a  trap  for  the  unwary, 
and  a  source  of  unrighteous  gain  by  men  recreant  to  their 
trusts. 

In  this  way  it  may  be  seen  that  an  earning  power  not 
known  to  bidders  in  the  market  does  not  enter  into  capitali- 
zation; a  fictitious  earning  power,  however,  is  capitalized  so 
long  as  the  investors  continue  to  be  deceived.     Instances 
of  this  kind  present  problems  not  only  of  private  morality, 
but  of  the  preservation  of  free  industrial  institutions.     The 
solution  of  these  problems  would  perhaps  be  hastened  if  the 
£   economic  nature  of  capitalization  were  more  clearly  under- 
stood.    Capital  value  in  modern  industry  is  everywhere  the 
\  expression  of  the  serial  rents  of  wealth,  discounted  at  a 


I 


prevailing  rate  of  time  discount.     ) 


CHAPTER  16 
INTEREST   ON  MONEY  LOANS 

§  I.      VARIOUS    FORMS    OF    CONTRACT    INTEREST 

1.     Interest,  the  amount  paid  according  to  contract  by  one  Distinction 
person  to  another  for  credit  given  in  terms  of  money,  is  but  between 

contract  in- 

one  expression  of  a  larger  problem,  that  of  the  difference  terestana 
in  present  worth  of  goods  at  two  periods  of  time.     This  time-value 
larger  problem  appears  under  several  forms:  first,  as  a  dif- 
ference in  value,   due  to  time,   where  there  is  no  money 
expression    (to    be   considered   in   the   following   chapter)  ; 
second,  in  discount  on  a  money  loan  for  a  short,  definite 
time;  third,  in  a  long-time  money  loan  at  a  fixed  rate  of 
interest ;  fourth,  in  a  credit  loan — that  is,  the  sale  of  the 
thing  on  credit  in  terms  of  money. 

The  last  three  cases  involve  interest  more  or  less  clearly. 
Time-discount,  as  will  be  more  fully  explained,  is  the  basis  • 
of  interest.  The  interest  may  be  greater  or  less  than  the 
time-discount  in  the  goods,  owing  to  miscalculation  on  the 
part  of  the  borrower  or  to  an  unforeseen  change  in  the 
conditions.  Men  bid  for  the  use  of  wealth  with  the  intention 
of  repaying  it  at  some  future  time,  and  the  interest  they 
agree  to  pay  is  based  on  their  estimate  of  the  discount  of 
future  rents,  which  they  think  is  involved  in  the  present 
valuations  of  the  goods.  Time-discount  is  involved  in  goods, 
however,  in  numberless  cases  where  there  is  no  contract  in- 
terest. Even  a  Robinson  Crusoe  must  recognize  in  his 
consumption  goods  and  in  his  various  indirect  agents  differ- 
ences in  value  at  different  periods  of  time,  of  which  he  must 
take  account. 

131 


132 


INTEREST  ON  MONEY  LOANS 


[CH.  16 


Risk  and 
expenses  to 
the  money- 
lender 


2.  Gross  interest  must  be  distinguished  from  net  interest. 
The  forms  of  wealth  yielding  incomes  are  so  mutable,  and 
are  used  under  such  complicated  conditions,  that  both  in 
theoretical  discussion  and  in  practice  much  care  is  needed 
to  distinguish  between  the  yield  attributable  to  the  income- 
bearer,  and  that  attributable  to  other  wealth  or  services  used 
in    connection    with    it.      That    the    sum    paid    as    interest 
on  a  loan  contains  other  elements  is  recognized  constantly 
in  practice.    As  in  the  case  of  contract-rent  allowance  must 
be   made   for  repairs  and   depreciation,   so   in  the   case  of 
contract-interest  allowance  must  be  made  for  risk,   or  the 
average  loss  occurring  in  the  industry.     Money  loaned  in 
hazardous  ventures  must  yield  a  higher  rate   of  interest. 
Likewise  capital  used  by  the  owner  in  a  hazardous  venture 
must  frequently  earn  very  high  returns   (not  all  logically 
interest)  to  offset  the  losses  that  are  likely  to  occur. 

The  lender  must  also,  in  estimating  net  interest,  count  the 
cost  of  placing,  supervising,  and  collecting  the  loan.  A 
pawnbroker  lends  only  small  sums  and  spends  much  time  and 
effort  to  keep  at  interest  a  moderate  capital.  Five  thousand 
dollars  loaned  in  sums  averaging  ten  dollars  represents  five 
hundred  transactions,  and  yet  if  placed  at  five  per  cent, 
it  yields  but  two  hundred  and  fifty  dollars  a  year.  While, 
therefore,  the  borrower  of  a  small  sum  estimates  the  eco- 
nomic interest  (or  anticipated  gain  in  income)  even  higher 
than  the  oppressively  high  contract-interest  he  may  be  forced 
to  pay,  the  lender  must  credit  a  large  part  of  the  gross 
interest  to  the  labor  he  expends  in  carrying  on  the  business. 

3.  The  most  usual  form  of  short-time  loan  is  that  made 
by  a  bank  or  broker  to  business  men  on  security  of  com- 
mercial paper.     By  commercial  paper  is  meant  promissory 
notes  given  by  customers  of  the  merchants,  bills  of  lading 
for  goods  that  have  been  shipped  to  their  customers,  and 
various  other  evidences  of  indebtedness  that  may  be  offered 
the  banks   for  discount.     When  goods  have  been  sold   on 
time   (as  thirty,  sixty,  or  ninety  days)   the  seller  has  the 


§1]  VARIOUS  FORMS  OF  CONTRACT  INTEREST  133 

choice  between  letting  the  time  expire  and  collecting  the  bills 
direct  from  the  customers,  and  discounting  the  bills  for 
ready  money  at  the  bank.  According  to  the  conditions  and 
needs  of  the  particular  business,  either  method  may  be 
chosen.  In  most  industries  there  is  need  for  larger  capital 
at  the  seasons  when  the  product  is  put  upon  the  market. 
The  merchant  or  manufacturer  plans  his  business  in  the 
expectation  of  an  average  rate  of  discount  at  such  times,  and 
if  it  chances  that  the  discount  rates  are  abnormally  high, 
he  has  no  choice  but  to  go  on  borrowing  and  paying  the  high 
interest  out  of  the  expected  profits  of  his  business.  This 
risk  of  a  change  in  the  interest  rate  is  one  of  many  chances 
he  has  to  run. 

4.  Most  debts  in  modern  times  are  outstanding  for  a  Long-time 
term  of  years  and  represent  the  lender's  purchase  of  a  claim  1(^r°^eof 
on  the  earnings  of  some  productive  enterprise.  The  simplest  mortgages, 
forms  of  long-time  loans  are  those  made  on  the  security  J^^j and 
of  real  estate,  which  is  mortgaged  to  the  lender  for  the 
term  of  the  debt.  Usually  the  debtor  is  obliged  to  pay  the 
interest  either  annually  or  semi-annually,  and  often,  but 
not  always,  is  permitted  to  reduce  the  principal  by  partial 
payments.  These  real-estate  mortgages  rest  on  the  security 
of  the  particular  mortgaged  wealth,  and,  unlike  most  short- 
time  loans  in  bank,  are  not  personal  obligations  resting  on  the 
general  credit  of  the  borrower.  Most  other  long-time  debts 
share  this  character  of  being  non-personal;  if  payment  is 
defaulted,  only  the  particular  wealth  can  be  sold  for  pay- 
ment, not  the  general  wealth  of  the  borrower.  Corporation 
bonds,  issued  by  railroads  and  other  large  stock  companies, 
have  increased  greatly  in  number  in  recent  years.  They 
yield  an  income  fixed  in  advance,  and  are  secured  usually  by 
mortgage  on  the  entire  property  of  the  corporation  issuing 
them.  The  income  of  some  special  kinds  of  "  preferred 
stocks  "  is  so  guaranteed  as  to  make  them  for  investors 
substantially  the  same  as  bonds.  Another  large  class  of 
long-time  loans  are  those  made  by  national,  state,  and  local 


134  INTEREST  ON  MONEY  LOANS  [CH.  16 

governments.  Tens  of  billions  of  dollars  of  public  debts  are 
now  outstanding,  held  by  private  investors  in  every  walk  of 
life. 

The  contract  in  the  case  of  each  kind  of  these  loans  pro- 
vides for  a  fixed  term  after  which  the  borrower  must  repay 
or  renew,  and  for  a  fixed  rate  on  the  nominal  or  par  value 
of  the  loan.  Nearly  all  the  securities  (bonds,  certificates, 
evidences  of  indebtedness)  are  salable  at  a  market  rate.  It 
is  therefore  the  income  that  is  fixed,  the  selling  price  (or 
capital  value)  fluctuating  above  or  below  the  nominal  sum 
except  just  at  the  moment  when  it  is  payable.  The  long- 
time loan  thus  is  very  similar  in  its  economic  character  to 
the  old-time  rent-charge. 

The  cost  oi  5.  The  sale  of  goods  on  credit  is  a  mode  of  lending  and 
B  involves  interest  in  a  disguised  form.  In  some  cases  mer- 
chants will  not  sell  cheaper  for  cash  than  for  credit,  for 
fear  of  offending  their  main  body  of  credit  customers;  but 
this  is  exceptional,  as  there  are  good  reasons  why  such  a 
difference  should  be  made.  The  credit  sale  usually  involves 
interest,  and  often  at  a  very  high  rate.  In  many  stores 
there  are  two  appreciably  different  prices,  one  for  "slow 
pay, ' '  the  other  for  ' '  spot  cash. "  If  a  bill  paid  at  the  end  of 
the  month  is  five  per  cent,  more  than  the  cash  price,  the 
difference  is  equal  to  sixty  per  cent,  per  annum  for  the  priv- 
ilege of  postponing  payment.  Such  a  rate  of  interest  is  paid 
only  by  the  improvident,  but  that  is  a  large  class  ranging 
from  factory  workers  to  college  students.  The  cash  dis- 
counts allowed  by  merchants  clearly  express  the  time  dif- 
ference. On  fifty  to  one  hundred  dollars  of  outstanding 
bills,  many  perfectly  honest  persons  are  paying  interest  at 
the  rate  of  seventy-five  per  cent,  per  annum.  The  merchant 
is  forced  to  make  this  difference  because  he  must  seek  not 
only  to  earn  interest  on  the  capital  thus  invested,  but  to 
recover  the  costs  of  bookkeeping  and  collections,  and  the 
risk  and  loss  of  unpaid  bills.  The  discounts  allowed  by  man- 
ufacturers and  wholesale  houses  measure  in  the  same  way 


§11]  THE  MOTIVE   FOR   PAYING  INTEREST  135 

the  difference  between  cash  and  credit  sales.  Not  unusual 
is  a  discount  of  "six  per  cent,  in  ten  days,  five  per  cent,  in 
thirty,  or  sixty  net."  The  buyer  allowing  his  bills  to 
run  for  two  months  (six  per  cent,  for  sixty  days)  pays 
thirty-six  per  cent,  per  annum  for  the  use  of  that  money. 
The  difference  is  so  great  that  it  is  impossible  to  carry  on  in 
this  way  a  large  business  against  strong  competition.  Such 
purchases  on  credit  frequently  are  made,  however,  by  dealers 
in  small  towns. 

6.  Interest  is  often  concealed  under  other  forms  which  Evasion  of 
increase  the  apparent  rate.  This  fact  is  well  shown  in  the  j^gairateof 
ways  by  which  usury  laws  fixing  the  legal  rate  of  interest 
are  evaded.  A  simple  method  is  for  the  lender  to  charge  a 
commission  for  making  the  loan,  or,  if  it  is  a  bank,  to  charge 
for  a  pretended  cost  of  exchange  to  bring  the  money  from 
some  other  city.  Sometimes  the  borrower  is  required  to  keep 
larger  deposits  with  the  bank  than  he  voluntarily  would. 
Needing  $5000,  he  is  compelled  to  borrow  $10,000  and  to  pay 
interest  on  twice  as  much  as  he  is  permitted  to  use.  Again 
the  borrower,  in  periods  of  unusual  demand  for  money,  is 
forced  to  make  a  long  loan  instead  of  a  short  one.  When 
a  one  month's  loan  at  ten  per  cent,  would  meet  his  need, 
he  is  forced  to  borrow  for  twelve  months  at  six  per  cent., 
during  ten  months  of  which  time  four  or  five  per  cent,  is 
the  prevailing  rate.  In  these  and  other  ways  the  real  rate, 
or  burden  of  the  loan,  is  made  different  from  that  which  is 
expressed. 

§  II.      THE  MOTIVE  FOR  PAYING  INTEREST 

1.     Interest   for   loans   to   obtain   consumption   goods   is  Money 

paid  because  they  are  felt  to  have  greater  importance  at  the  ^uW^n. 

moment  than  an  equal  amount  (either  of  goods  or  of  money)  sumption 

will  have  in  the  future.    A  sudden  stress  of  misfortune  may  good 

impart  to  a  thing  at  the  moment  far  more  than  its  usual  •* 

value.     One  standing  face  to  face  with  starvation  cannot  '         f\ 


136  INTEREST   ON  MONEY   LOANS  [CH.  le 

be  worse  off  a  year  hence ;  often  there  is  good  ground  to  hope 
that  if  the  present  misfortune  can  be  relieved,  the  future 
better  fortune  will  make  it  possible  to  repay  a  loan  with 
interest.  In  other  cases,  the  object  of  a  loan  of  consumption 
goods  is  to  increase  the  future  earning-power  of  the  Bor- 
rower. When  the  student  borrows  money  that  represents 
to  him  food,  clothing,  text-books,  tuition,  and  other  expenses 
incidental  to  a  course  in  college,  the  expenditure  is  intended 
to  increase  the  effectiveness  of  the  worker.  When  he  bor- 
rows he  has  little  earning-power,  but  with  that  faith  in 
himself  which  makes  the  young  American  so  interesting,  he 
pictures  himself  four  years  later,  sheepskin  in  hand,  drawing 
a  munificent  salary  with  which  he  can  easily  satisfy  U:he  most 
exacting  Shy  lock.  Such  an  expenditure  is  sometimes  called 
"  an  investment  of  capital,"  but  it  should  be  called  a  con- 
sumption loan — nevertheless  in  many  cases  a  loan  wisely 
made.  To  call  this  an  investment  of  capital  is  to  confuse 
man,  the  end  of  production,  with  material  means. 

Sometimes  this  higher  estimate  of  the  present  good  is  un- 
wise, viewed  in  the  light  of  wider  experience.  Goods  that 
meet  momentary  desire  make  an  exaggerated  appeal  to 
untrained  minds.  The  child,  the  spendthrift,  the  savage, 
cannot  properly  estimate  the  relative  values  of  present  and 
future.  The  improvident  sometimes  lightly  agree  to  pay 
an  exorbitant  interest  for  an  immediate  consumption  loan, 
making  a  ruinous  difference  between  present  and  future 
gratifications. 

2.  Interest  on  indirect  agents  is  paid  as  a  more  or  less 
indirect  means  of  securing  gratification.  This  can  be  clearly 
seen  when  durable  agents  are  hired  that  produce  gratification 
directly.  A  carriage  bought  with  borrowed  capital  and  used 
for  the  pleasure  of  the  borrower  is  expected  to  afford  a 
utility  greater  than  that  to  be  gotten  by  the  amounFoJUhe 
interest  in  any  other  way.  A  spade  bought  with  borrowed 
capital  and  used  to  cultivate  the  owner's  garden  is  expected 
to  add  products  of  greater  value  than  the  interest. 


: 


THE   MOTIVE  FOR  PAYING   INTEREST  137 


But  how  is  it  in  case  the  agent  is  used  to  gratify  persons 
other  than  the  owner  ?  The  music-teacher  who  buys  a  piano 
on  credit  expects  to  increase  his  earnings  by  a  sum  greater 
than  the  interest  he  has  to  pay.  If  the  addition  to  his 
earnings  exceeds  the  interest  charge,  it  is  because  he  has 
found  a  use  for  the  borrowed  capital  greater  than  that  on 
the  basis  of  which  it  was  capitalized  in  the  market.  The 
amount  of  the  interest  is  secured  through  the  pleasures  and 
services  the  piano  affords  to  the  patrons  of  the  teacher.  In 
the  most  complex  cases  of  the  borrowing  and  use  of  indirect 
agents,  there  is  ultimately  this  same  basis  for  the  interest: 
enjoyment  afforded  by  the  use  of  capital  in  the  partic- 
ular period.  To  the  borrower,  what  the  capital  makes 
possible  is  an  addition  to  his  income  as  great  as,  or  greater 
than,  the  prevailing  interest.  Most  loans  in  our  society 
are  now  of  this  sort.  Money  is  borrowed  to  invest  in  busi- 
ness, to  get  better  machinery  or  a  larger  stock;  with  this 
capital  is  secured  a  better  or  larger  product,  and  the  product 
finally  being  sold  at  a  profit,  the  business  man  is  at  a  point 
where  he  can  satisfy  his  wants  without  encroaching  on  his 
capital.  Logically,  therefore,  the  consumer  of  the  product 
pays  the  interest  in  the  price,  and  the  final  consumer's  en- 
joyment must  be  deemed  the  logical  source  of  the  money 
interest.  The  borrower's  motive  for  paying  interest  on  these 
indirect  goods  evidently  is  His  hope  of  profit  through  realiz- 
ing a  greater  money  rent  than  he  has  contracted  to  pay  for 
their  use. 

3.     The  money  market  in  which  short-time  loans  are  made  The  special 
is  peculiar  in  that  the  money  frequently  is  borrowed  to  pay  caseofta 
debts,  not  for  investment.     In  beginning  the  discussion  of  rowed  to 
interest,  it  always  is  remarked  that  it  is  not  money,  but  cap-  Paydebts 
ital,  that  is  borrowed  and  loaned.    This  caution  against  the 
superficial  errors  that  so  easily  beset  the  popular  discussion 
of  interest  is  much  needed,  but  it  is  well  to  note  a  peculiar 
case  which  is  apparently  in  contradiction  to  this  statement. 
The  usual  method  by  which  money  is  loaned  in  the  great 


138  INTEREST   ON  MONEY   LOANS  [CH.  16 

industrial  centers  is  called  discount,  which  is  the  exchange 
of  a  certain  sum  of  money  for  a  note  or  other  credit  paper 
of  a  larger  amount,  the  interest  thus  being  taken  out  in 
advance.  Much  borrowing  in  the  form  of  discount  is  for 
the  same  purpose  as  other  borrowing— to  acquire  control  of 
more  productive  agents,  to  embark  on  new  enterprises.  The 
peculiarity  of  the  discount  money-market  is  that  an  unusual 
number  of  loans  are  made  to  meet  contracts  that  have  al- 
ready been  made.  There  is  always  a  great  mass  of  out- 
standing obligations,  and  merchants  are  compelled  to  renew 
these  loans  on  penalty  of  bankruptcy.  This  market  for  short- 
time  loans  is  not  connected  closely  with  the  general  market 
for  loanable  capital.  When  the  need  is  for  ready  money, 
other  concrete  capital  cannot  flow  in  to  meet  it.  This  special 
money  demand,  therefore,  in  time  of  greater  or  less  stress, 
may  fluctuate  rapidly,  and  the  interest  rate  be  temporarily 
higher  or  lower  than  the  rate  on  long-time  loans.  This  case 
is  similar  to  that  where  two  markets,  as  a  retail  and  a  whole- 
sale one,  exist  side  by  side,  but  slowly  exerting  a  mutual 
influence. 

4.  In  the  long-time  money  loan  the  money  generally  is 
borrowed  first  merely  as  a  medium  of  exchange  to  get  con- 
trol of  indirect  agents.  The  borrower  of  a  long-time  money 
loan  for  productive  purposes  is  always  seeking  to  gain  by 
investing  the  money  in  wealth  that  will  yield  an  income 
larger  than  the  interest  he  must  pay.  The  borrower,  there- 
fore, invests  in  view  of  the  rate  of  interest,  of  the  market 
'  ^pfice  of  the  goods  in  which  he  plans  to  invest,  and  of  the 
probable  chances  for  earning  profits  in  the  business. 
This  case,  where  certain  goods  whp^e_price^jsJmojfflCL_are 
approximately  selected  before  the  money  is  borrowed  for 
investment,  is  the  type  of  loan  to  be  kept  most  usually  in 
mind  in  economic  discussion. 

Evidently  the  price  of  these  goods,  to  control  which  is  the 
real  object  of  the  loan,  is  merely  the  sum  of  the  expected 
rents  they  will  yield,  capitalized  at  the  prevailing  rate  of 


$11]  THE  MOTIVE  FOR   PAYING  INTEREST  139 

time-discount^^he  borrower  expects  either  to  make  these 
particular  goods  earn  rents  larger  than  those  on  the  basis 
-of  which  they  have  been  capitalized,  or  to  transfer  them  to 
an  economy  wheregoods  are  capitalized  at  a  higher  rate 
than  he  is  paying.  JjThe  income  yielded  by  these  goods,  if  the 
borrower's  expectation  is  fulfilled,  is  but  the  difference  be- 
tween present  and  future  rents  that  has  been  wrapped  up  in 
their  capitalization.  As  time  elapses  and  the  rents  emerge 
in  wisely  chosen  investments,  the  borrower  has  a  surplus 
large  enough  to  pay  the  contract  interest._jlt  appears,  there- 
fore, that  [the  motive  of  the  borrower  is  to  get  control  of 
future  rents  at  prices  that  already  involve,  in  their  capitali- 
zation, a  rate  of  discount  somewhat  greater,  than  the  interest 
he  contracts  to  pay. 

"5~.     ^RTe  rate  of  contract  interest  on  money  loans  is  ad-  Thede- 
justed  at  each  moment  in  the  money  market  by  the  bidding  mlrkSfor 
for  money  loans.    This  is  a  true  statement  only  if  it  is  under-  money  loans 
stood  in  a  somewhat  superficial  sense.     No  error  connected 
with  interest  is,  however,  more  crude  than  the  view  that  the  J 
interest  rate  is  in  any -broad  -sense  due  to  the  quantity  of  I 
money.     Some  loans  are  made  apart  from  the  general  mar- 
ket,  by  private   agreement  between  borrower  and  lender; 
but  in  nearly  every  such  case  the  rate  agreed  upon  is  seen 
to  be  closely  related  to  that  of  the  general  market  to  which 
either   borrower  or   lender  can   resort   if   he   wishes.      The 
greater  number  of  borrowers  and  lenders  of  money  have  a 
range  of  choice  in  their  bargaining.     The  interest_rate  IIL 
modern  developedjmmey  markets  is  that  rate  which  brings_C^xtx 
to  equilibrium  the  demand  for  money  loans  and  the  money 
capital'a^TTaDTe^within  the  period.     If  the  ready,  loanable 
money  in  private  hands,  in  banks,  in  insurance-company  re- 
serves, &c.,  increases,  a  lower  rate  must  be  offered  to  bor- 
rowers ;  if  the  supply  decreases,  a  higher  rate  will  be  quoted. 
In  the  one  case,  more  meji  borrow ;  in  the  other,  fewer  borrow 
and  more  seek  to  lendA  Thus  a  rate  results,  but  a  rate  that 
is  closely  connected  witna  larger  set  of  facts— those,  indeed, 


140 


INTEREST  ON  MONEY  LOANS 


[CH.  16 


Every  per- 
son is  a 
buyer  or  a 
seller  of 
present 
goods 


which  determine  in  the  lon^  run  the  rate  of  capitalization 
in  the  community.  _ 

6.  The  individual  must  adjust  his  business  dealings  to 
the  market  rate  of  interest.  The  market  rate  is  fixed  by  the 
bidding  of  individuals,  and  every  one  has  something  to  do 
with  fixing  it.  In  a  multitude  of  minutely  small  ways,  as 
present  and  future  goods  are  compared  by  men,  the  rate 
of  interest  is  affected  positively  or  negatively.  But  for 
practical  purposes  the  individual,  counting  for  little  in  the 
midst  of  millions,  must  look  upon  the  interest  rate  as  beyond 
his  influence.  Therefore,  while  the  rate  is  determined  by 
each  to  some  degree,  all  that  any  one  does  is  to  buy  or  sell 
present  goods,  borrow  or  lend  capital,  use  up  or  save  wealth, 
according  as  his  own  estimate  of  time-value  is  less  or  more 
than  the  market  rate.  In  fact,  the  estimates  of  individuals 
diverge  constantly  from  the  market  rate,  but  are  brought 
into  harmony  by  their  actions  with  reference  both  to  money 
loans  and  to  the  use  and  valuation  of  the  various  forms  of 
wealth.  A  Robinson  Crusoe  working  on  his  island  and 
valuing  future  goods  relatively  to  present  goods  higher  than 
before,  consumes  less;  or,  valuing  them  lower,  consumes 
more.  The  business  man  who  values  indirect  agents  above 
the  market  rate  borrows,  and  if  he  miscalculates  and  fails  to 
make  them  earn  the  expected  rent,  he  loses.  In  this  experi- 
mental way  many  other  acts  are  influenced  by  the  prevailing 
interest  rate  and  in  turn  affect  it,  thus  aiding  to  formulate 
society's  estimate  of  the  value  of  present  as  compared  with 
future  rents. 


CHAPTER  17 
THE    THEORY    OF    TIME-VALUE 

§  I.      DEFINITION    AND    SCOPE    OF    TIME-VALUE 

1.     Time-value  is   the  difference   betiveen  the  values  of  Thesim- 
things  at  different  times.    Things  differ  in  value  according  to  Ples.tcases 

of.  time- 

form,  place,  quality  of  goods,  and  according  to  the  feelings  value 
of  men,  and— not  least  important  factor— according  to  time. 
The  simplest  and  clearest  case  of  time-value  is  the  difference 
noticeable  in  the  same  thing  at  different  moments.  Is  this 
good  worth  more  now  or  next  week?  Shall  this  apple  be 
eaten  now  or  next  winter  ?  These  questions  can  be  answered 
only  after  comparing  the  marginal  utilities  which  differ 
according  to  the  varying  conditions  of  the  two  periods. 

All  the  other  cases  of  time-value  can,  by  the  practical 
device  of  substituting  other  goods  of  equivalent  value,  be 
reduced  to  the  typical  case  of  comparison  of  the  same  thing 
at  different  times.  The  comparison  may  be  between  very 
similar  things,  the  one  consumed  being  replaced  by  a  du- 
plicate. An  apple  borrowed  now  may  be  returned  next  year 
in  the  form  of  one  of  the  same  size  and  quality.  The  essen- 
tial thing  in  this  comparison  is. not  physical  identity,, but 
equivalence  in  size,  sort,  and  quality  at  the  two  periods. 
Tliis  is  borrowing  under  the  renting  contract. 

But  two  or  more  quite  different  things  may  be  expressed  Time-value 
in  terms   of   another   thing   and   so   be   made   comparable.   UJJ^JJ 
Money    becomes    the    value-unit    through    which    different  kinds  of 
things  mavjbej-edueed  to  the  same  terms  for  flnipparison.   ^f" 
With  this  mode  of  expressing  the  value-equivalence  of  vari- 

141 


142 


THE  THEORY  OF  TIME-VALUE 


[CH.  17 


ous  goods,  the  interest  contract  first  becomes  possible,  money 
(the  standard  of  deferred  payments)  being  the  thing  ex- 
changed (possibly  only  in  name)  at  two  periods  of  time. 
What  is  really  compared  are  various  gratifications  which 
may  be  produced  by  very  different  material  things  or  ser- 
vices._/ln  its  last  analysis  comparison  of  values  at  different 
periods  of  time  must  be  a  comparison  of  psychic  incomes,  of 
two  sums  of  gratification.  The  comparison  of  the  value  of  a 
bushel  of  apples  with  that  of  a  barrel  of  potatoes  or  a  suit 
of  clothes  at  the  same  moment  appears  simple  enough. 
When  all  are  expressed  in  terms  of  money,  the  comparison  of 
each  with  its  value-equivalent  at  a  later  date  becomes 
easy.  The  simplicity  and  obviousness  of  time-value  in  the 
case  of  money  loans  at  interest  led  men  at  first  to  recognize 
that  phase  of  the  problem  exclusively,  and  later  the  term 
"  interest,"  not  without  much  confusion  of  thought,  was 
given  a  wider  significance.  Let  us  now  see  how  large  a  part 
of  the  whole  problem  of  time-value  is  toutsidej  of  the  money 
loan. 

2.  The  problem  of  time-value  is  quite  separable  from  the 
concepts  of  money  and  capital,  though  usually  connected 
with  them  in  practice  and  theory.  It  is  true  that  the  problem 
of  time-value  was  first  clearly  recognized  in  connection  with 
money  and  a  formally  expressed  capital  sum.  Misled  by 
this  fact,  and  taking  a  very  narrow  view,  writers  seventy- 
five  years  ago  recognized  but  dimly  the  problem  of  time- 
value  in  connection  with  the  valuation  of  the  incomes  de- 
rived from  land.  It  is  true,  as  has  been  shown  above,  that 
the  mere  putting  of  an  estimate  on  a  durable  good  such  as 
land  involves  the  process  of  capitalization,  which  in  turn 
implies  a  comparison  of  the  values  of  the  rents  expected 
at  different  periods.  Diminishing  returns  in  the  use  of 
agents  involves  a  loss  of  time  to  secure  the  usufructs  emerg- 
ing. The  relation  of  these  facts  was  not  clearly  seen  until 
of  late. 

The  phenomenon  of  time-value  as  above  defined  may  be 


DEFINITION   AND   SCOPE   OF   TIME-  VALUE  143 


seen  to  be  broader  even  than  that  of  capitalization. 
difference  in  the  value  of  the  successive  rents  of  wealth 
must  have  been  recognized  and  in  some  degree  measured 
before  there  was  any  conscious  calculation  of  capital  value. 
Differences  in  value  due  to  time  are  everywhere.  The  prob- 
lem of  time-value  often  is  present  where  money  is  not  even 
spoken  of  or  thought  of.  Money  no  more  causes  this  time- 
difference  in  value  than  balances  cause  weight. 

3.  The  problem  of  time-value  is  involved  in  repairs  and  Time-value 
depreciation,  and  in  the  use  of  consumption  goods.  It  is  istakenac 
possible,  as  we  have  seen,  to  increase  the  sum  available  for  the  keeping 
present  needs,  and  to  encroach  upon  the  future  by  postpon- 
ing  repairs  on  intermediate  goods.  The  balancing  of  the 
cost  of  repairs  against  the  future  income  is  a  never-ending 
task  in  practical  business.  One  making  repairs  must  pur- 
chase the  needed  materials  and  labor  at  a  capitalization 
determined  by  their  expected  earning-power  in  other  in- 
dustries. If  the  repairs  in  question  will  not  ensure  an  annual 
saving  as  great  as  this  expected  rent,  they  will  not  be  made. 
When  an  industry  is  declining,  it  may,  for  the  sake  of 
putting  the  capital  into  a  better  business,  be  good  policy 
to  let  the  machinery  fall  into  bad  repair.  The  problem  of 
time-value  is  involved  in  the  application  of  one's  energy 
to  repairing  one's  own  possessions.  It  is  a  thought  of  wide 
bearings  that  numberless  minor  decisions  in  every  petty 
business  involve,  if  they  are  correctly  made,  a  measuring 
of  the  rate  of  capitalization. 

As  will  be  more  fully  shown  in  discussing  the  relation  of  And  in  the 
the  prevailing  rate  of  interest  to  saving,  the  recognition 
of  time-value  is  implied  in  the  use  men  make  of  consumption 
goods,  in  their  postponement  of  enjoyment,  in  their  storing 
of  goods  for  future  use/  The  varying  gratifications  yielded 
by  consumption  goods,  and  their  values  in  different  con- 
ditions cannot  be  explained  without  taking  account  of 
differences  in  time.  Wherever  there  can  be  a  choice  in  the 
time  at  which,  and  consequently  in  the  conditions  under 


144 


THE   THEORY  OF   TIME-VALUE 


[CH.  17 


which,  a  thing  can  be  used,  there  is  a  choice  presented  be- 
tween the  different  values.  Time-value  is  present  even  in 
a  period  during  which  no  goods  continue  to  exist,  as  when 
a  good  is  consumed  at  a  moment  of  greater  need,  to  be 
replaced  at  a  time  when  less  valuable.  If  an  apple  is  bor- 
rowed on  the  promise  to  return  an  apple  and  a  peach  at  the 
end  of  a  year,  the  peach  represents  the  time-difference  in 
value  but  in  the  meantime  there  has  been  no  apple  in  exist- 
ence. It  is  only  in  a  figurative  sense  that  it  may  Jbe  said 
that  interest  is  paid  on  that  "  capital."  Interest  is  paid 
because  of  a  difference,  in  want-gratifying'  power,  but  during 
the  interval  there  is  no  material  capital. 

4.  The  problem  of  time-value  is  involved  in  much  foolish 
pleasure,  in  prodigality,  and  in  vice.  Economics  touches  fre- 
quently on  the  borders  of  ethics.  If  there  were  to  be  formu- 
lated an  economics  of  personal  conduct,  it  surely  would  give 
a  large  place  to  the  comparison  between  present  and  future 
pleasures.  Forethought,  or  prudence,  is  the  virtue  of 
recognizing  not  only  future  dangers  to  be  avoided,  but  the 
greater  future  joys  to  be  gained  in  exchange  for  present 
pleasures.  The  reckless  and  the  prodigal  underestimate  the 
future  and  barter  all  to  gratify  the  moment's  impulse.  The 
drinker  exchanges  the  hopes  of  worthy  life  for  the  exhilara- 
tion of  the  spree.  Indulgence  in  social  pleasures,  if  secured 
at  the  price  of  lost  sleep,  weakened  health,  and  debauched 
character,  are  loans  from  the  future  made  by  youthful 
prodigals  at  usurious  interest.  If  no  one  ever  paid  more 
;han  a  moderate  rate  of  interest  for  the  gratification  of  his 
jresent  whims  and  impulses,  most  hospitals,  drug-stores, 
and  medical  colleges  would  close,  and  half,  if  not  all,  the 
prisons  would  be  empty. 

Indeed,  time  difference  in  value  is  a  universal  phenomenon 
of  life  and  conduct.  Contract  interest  is  but  one  phenomenal 
form  of  time-value,  and  this  in  turn  is  but  one  phase  of 
value.  This  section  may  serve  to  suggest  how  much  more 
varied  and  pervasive  the  fact  of  time-value  is  than  has 


§11]      ADJUSTMENT  OF  THE  RATE  OF  TIME-DISCOUNT      145 

usually  been  recognized  in  popular  or  economic  discussion 
of  the  subject  of  interest. 


§  II.      THE   ADJUSTMENT   OF   THE   RATE   OP   TIME-DISCOUNT 

/    1.     The  fixing  of  the  discount  on  future  goods  is,  in  its  es-  Theex- 
isentials,  like  the  fixing  of  the  market  price  of  consumption  ^JJJfJ, 
goods.    This  problem  appears  to  be  one  of  the  most  difficult  present  and 
in  economic  theory;  but  reduced  to  its  simplest  terms,  it  is  futuregoods 
ajijispect  of  exchange  value,  and  its  ultimate  explanation 
must  be  found  in  a  comparison  of  psychic  incomes. '  There 
must  be  noted  the  conditions  of  demand  and  supply,  the 
interplay  and  final  equilibrium  of  the  two  forces.     The  de- 
clining and  marginal  utility  to  the  two  parties  to  exchange 
must  be  carefully  analyzed.     One  who  can  do  these  things 
is  prepared  to  find  the  answer  to  the  problem  of  time-value. 
Whenever  a  group  of  buyers  and  sellers  meet,  a  ratio  of 
exchange  commonly  will  be  arrived  at.[jThe  ratio  of  ex- 
change between  buyers  and  sellers  of  present  and  future 
rents  likewise  is  fixed  at  the  estimates  of  a  ' '  marginal  pair, ' ' 
at  which  point  the  amount  offered  and  taken  comes  to  equi- 
librium, for  at  that  point  no  motive  exists  for  any  one  to 
change  sides. 

2.     Time-value  as  the  premium  rate  on  present  goods  is  The  peculiar 

jmZftfcgJfrfl  nrdin/f.ry  wgrkpf.  prir.e.  nf  goods  Only  in  the  Special    J£e  e™_° 

nature  of  the  utilities  exchanged.  The  one  peculiar  need  in  change  in 
the  theory  of  this  subject  is  a  clear  understanding  on  this 
point.  The  goods  exchanged,  or  compared,  are  direct  and 
indirect  goods,  or  present  and  future  goods,  or,  more  gen- 
erally speaking,  two  goods  or  groups  of  goods  unequally  dis- 
tant  in  time  from  present  enjoyment^  WhaTare  so^d.in  a 
case  such  as  capitalization^involvmg  an  estimate  of  time- 
value,  are  [present  goods  or  gratifications ;  what  are  bought 
are  (future)  gratifications,  or  indirect  agents  which  stand  for, 
typify,  or  make  possible,  future  gratifications.  Practically 

every  man  in  a  market  acts  on  the  knowledge  of  what  the 
10 


146 


THE   THEORY  OF  TIME-  VALUE 


[CH.  17 


The  scarcity 


tions 


exchange  of  direct  and  indirect  goods  means;  yet  abstractly 
stated,  the  thought  seems  at  first  difficult.  In  valuing  any 
durable  good,  the  theory  of  time-value  is  implied.  Every 
time  a  machine,  a  house,  a  book,  a  field,  is  bought,  the  distinc- 
tion between  direct  and  indirect  goods  is  acted  upon,  for  a 
choice  has  been  made  between  present  enjoyment  and  future 
provision.  Anything  that  endures  is  an  indirect  good  and 
implies  in  its  valuation  a  premium  rate  on  present  goods. 

The  real  nature  of  the  exchange  in  time-valuation  is  made 
unclear  by  the  uncertainty  of  life,  leading  men  to  work  on  to 
provide  against  possibility  of  mishaps;  for  the  most  part 
the  world's  treasures  never  afford  to  their  temporary  owners 
the  gratification  that  they  typify,  or  could  give.  The 
nature  of  this  exchange  is  made  unclear  also  by  habit,_ 
under  the  influence  of  which  the  exchange  in  so  many  cases 
is  not  carefully  thought  out,  is  not  the  result  of  a  close 
comparison  of  the  utilities  of  goods  in  present  and  future 
j  moments.  The  real  nature  of  this  exchange  is  made  unclear 
!  by  the  indirect,  or  induced,  gratification  derived  from  wealth. 
Wealth  gives  to  its  owner  power,  prestige,  the  esteem 
of  his  fellows,  and  pride  in  evidences  of  success  and  grow- 
ing prosperity.  Its  very  possession  creates  a  new  need 
and  imparts  to  it  another  utility,  that  of  insuring  against 
the  misery  of  a  declining  fortune  one  who  has  enjoyed 
wealth  and  power.  Men  make  the  greatest  efforts  up  to  the 
last  moment  of  life  to  retain  wealth  that  they  will  enjoy  only 
in  this  subtle  and  indirect  way.  Thus  every  motive  that 
leads  men  to  postpone  present  enjoyment  makes  them  bidders 
for  indirect  agents  and  for  future  goods,  and  helps  to 
determine  the  market  rate  of  premium  on  the  present,  and 
of  discount  on  the  future. 

3.  There  being  a  limited  number  of  indirect  agents, 
their  limited  powers  in  a  given  period  limit  the  supply  of 
present  goods.  The  principle  is  familiar  that  value  is  always 
connected  with  relative  scarcity.  Now  the  desire  for  the 
present  goods  is  indefinitely  large.  If  the  right  kind  and 


§11]      ADJUSTMENT   OF  THE   RATE   OF   TIME-DISCOUNT     147 

quality  could  be  had  at  will,  an  enormously  greater  amount 
of  present  goods  would  be  used.  But  the  present  goods  are 
dependent  on  indirect  agents.  The  psychic  income  of  a 
civilized  community  is  dependent  on  a  favorable  and  ex- 
tremely refined  environment:  houses,  libraries,  theaters,  the 
agencies  of  travel,  as  well  as  the  sources  supplying  the  more 
material  needs.  These  indirect  agents,  even  in  the  richest 
community,  are  limited  in  variety,  in  quality,  and  in 
number. 

But  if  indirect  agents  could  produce  an  indefinitely  large  The  total 
product  at  any  given  moment,  the  supply  of  present  goods  °fs^re 
could   be   indefinitely  increased.      TJxe-^supply  of  utilities^  vastly 
therefore,  is  limited  by  "  diminishing  returns  "  in  the  use  grea 
of    agents,    making    their    maximum    yield    depend    upon 
the  lapse  of  time.     The  uses  any  given  material  can  yield 
in  a  limited  period  have  an  absolute  limit:  an  acre  of  land 
with  the  most  perfect  cultivation  cannot  feed  the  world;  . 
but  remove  the  limit  of  time,  wait  an  eternity,  and  the  acre 
would  yield  an  infinite  crop.    The  economic  return  of  a  given 
agent  in  a  given  period  is  reached  much  sooner  than  the 
technical  return.    If  agents  are  forced  to  yield  more  bounti- 
fully,  it   is   at   the   sacrifice   of   utilities   in   other   agents, 
and  a  point  of  maximum  net  yield  is  found  in  any  given 
period.    Here  also  the  lapse  of  time  is  the  condition  of  the 
increase  of  the  net  utilities  derivable  from  limited  agents. 

4.     The  rate  of  capitalization  of  income  and  the  rate  of  The  choice 
contract  interest  on  money  capital  tend  to  unite  into  a  single  jester  of 
market  rate.     A  person  wishing  to  exchange  present  goods  money 
or  income  for  future  goods  may  bu£  an  income-bearer  at  its 
capitalized  value,  or  he  may  create  a  new  rent-bearer.    Hav- 
ing saved  a  sum  of  money,  either  he  may  purchase  a  factory 
known  to  be  profitable;  or  he  may  hire  the  services  of  men 
and  unite  them  with  materials  and  machinery  to  create  a 
new  industry  or  a  new  form  of  income-bearer;  or  he  may 
loan  his  money  to  others  to  make  either  kind  of  purchase. 
In  any  one  of  the  three  cases  it  is  evident  that  capitalization 


148 


THE   THEORY  OF   TIME-VALUE 


[CH.  17 


(that  is,  the  discounting  of  future  rents  in  goods)   is  the. 

primary  and  important  fact  making  possible  the  emergence 

of  a  surplus,  or  net  yield,  over  and  above  the  value  of  the 

capital.     The  expected  uses  contained  not  only  in  whole 

industrial   establishments,   but  in  the  particular  materials 

and    agents    united    to    form    new    agents,    are    purchased 

at  their  capitalized  value;   that  is,   the  future  uses  have 

been   discounted   and   have   entered   into   the   price   of   the 

goods  as  less  than  they  will  be  when  realized  as  actual  rents. 

This  is  the  crucial  point  in  the  theory  either  of  contract 

interest  or  of  time  value ;  for  to  explain  the  rate^  of  interest 

as  due  to  the  proces~s"  of  "producing"  capital  agents  out 

-3      of  other  materials,  is  to  Ijgg  the  question  involved.    The  sur- 

|   plus  yielded  by  capital  above  its  cost  is  but  the  realization 

I   of  a  net  income  made  possible  by  the  discounting  of  future 

*   rents. 

The  choice  A  person  wishing  to  make  an  exchange  of  the  opposite  kind 
borrower^  *°  ^at  described  may  sell  his  wealth  for  money ;  he  may  ex- 
weaith  change  for  present  enjoyable  goods  his  income  at  its  capital- 
ized value ;  or  he  may  use  up  what  he  has,  let  it  depreciate, 
fail  to  make  repairs,  convert  it  to  various  consumption  pur- 
poses, and  thus  invade  his  earning  power.  When  the  interest 
rate  is  five  per  cent.,  the  sacrifice  of  any  unit  of  regular  in- 
come permits  the  spending  of  twenty  times  that  amount  for 
present  enjoyment.  The  advantages  of  these  various  methods 
tend  to  equilibrium.  If  the  owners  of  developed  productive 
agents  hold  them  at  too  high  a  capitalized  value,  investors 
will  apply  their  efforts  and  savings  to  duplicating  these  forms 
of  wealth.  If,  in  turn,  any  of  the  minor  factors,  as  materials 
or  uses  of  goods,  are  overvalued  (overcapitalized)  it  will 
appear  ultimately  in  a  check  in  the  demand  for  them  at  these 
prices,  and  in  a  reduction  in  the  demand  for  money  loans. 
As  it  is  possible  for  any  investor  and  for  any  borrower  to 
choose  among  these  investments  and  loans,  there  is  practically 
but  one  rate,  the  rate  which  expresses  the  general  ratio  of  ex- 
change between  present  and  future  income.  Owners  and  in- 


Ul]      ADJUSTMENT  OF  THE  BATE  OF  TIME-DISCOUNT     149 

vestors  take  the  line  of  least  resistance,  get  the  most  they  can 
for  their  money,  and  choose  whatever  form  is  most  advan- 
tageous. The  interrelations  between  the  various  interest 
rates  are  therefore  close  and  constant.  The  market  rate  of 
interest  thus  extends  over  all  forms  of  wealth  and  pervades 
every  phase  of  business./  The  value  of  every  durable  agent  is 
fixed  with  reference  to  a  prevailing  interest  rate,  through  the  V 
discounting  to  their  present  worth  of  all  the  incomes  it  is  be- 
lieved to  contain. 

5.  Where~goods  are  sold  at  forced  sale  or  sacrifice,  it  is  A  sacrifice 
equivalent  to  a  contract  loan  at  a  high  rate  of  interest.    Mar-  sale  in~ 
ket  values  being  dependent  upon  market  conditions,  the  offer  h^rate 
of  goods  at  a  given  moment  may  not  find  the  usual  or  normal   of  interest 
number  of  buyers  or  the  usual  demand.    Just  such  conditions 

are  most  likely  to  exist  at  the  times  when  business  men  feel 
an  unusual  need  of  money.  Two  courses  are  open  to  them  in 
this  emergency,  either  to  borrow  the  money  at  a  very  high 
rate  of  interest,  holding  the  goods  for  better  prices,  or  to  sell 
the  goods  under  the  unfavorable  conditions.  The  end  of  both 
courses  is  the  same— to  get  ready  money ;  and  the  methods  are 
not  essentially  unlike— the  exchange  of  greater  future  values 
for  present  values.  The  sacrifice  sale  thus  reveals  the  mer- 
chant's high  estimate  of  the  interest  rate.  The  purchaser  of 
some  kinds  of  property  in  times  of  depression  is  securing 
them  at  a  lower  capitalization  than  they  will  later  have.  The 
rise  in  value  may  be  foreseen  as  well  by  seller  as  by  buyer,  but 
the  low  capitalization  reflects  the  high  interest  rate  tempo- 
rarily obtaining.  A.  T.  Stewart  is  said  to  have  laid  the 
foundation  of  his  fortune  when,  being  out  of  debt  himself, 
he  bought  up  the  bankrupt  stocks  of  his  competitors  in  a 
great  financial  panic.  The  high  contract  interest  at  such 
times  is  but  the  reflection  of  the  high  premium  on  present 
purchasing  power.  Here  then  is  another  mode  in  which  the 
prevailing  rate  of  interest  on  money  loans  is  kept  in  close 
harmony  with  the  rate  of  time  valuation. 

6.  The  rate  of  contract  interest  on  safe  long-time  loans 


150  THE   THEORY  OF   TIME-VALUE  [CH.  17 

interreia-  registers  pretty  nearly  the  prevailing  rate  of  time-discount 
in  the  community.  There  are  of  course  different  capital 
terestrate  markets,  and  the  estimates  put  upon  next  year's  income  as 
discount"1  "  comPared  with  this  year's  is  very  different  in  Montana,  New 
York,  and  London.  Because  of  the  friction  in  the  transfer 
of  investments  from  one  locality  to  another,  these  differences 
may  persist  indefinitely;  but  within  each  capital  market 
the  interest  on  any  particular  loan  must,  for  reasons  readily 
seen,  tend  to  conform  pretty  closely  to  the  prevailing  rate. 
Various  groups  of  men  living  in  the  same  community  have, 
however,  varying  estimates  of  time-value.  The  increase  of 
safe  long-time  bonds  issued  by  strong  corporations  and  by 
wealthy  nations  as,  for  example,  the  New  York  Central 
Railroad,  and  the  government  of  Great  Britain,  gives  a 
large  number  of  choice  investments  where  the  element  of 
risk  is  almost  entirely  absent.  Various  agencies  have  devel- 
oped for  making  the  loans,  that  is,  for  bringing  the  borrower 
and  lender  together  with  the  minimum  of  trouble  and  ex- 
pense. Other  efficient,  but  somewhat  more  costly,  agencies 
for  bringing  together  the  owners  of  loanable  capital  and  men 
wishing  to  use  capital  are  savings-banks,  building  and  loan 
associations,  insurance  companies  issuing  endowment  poli- 
cies, and  mortgage-investment  companies  of  many  kinds. 
While  on  the  one  side  of  the  bidding  are  thousands  of  lenders 
offering  to  exchange  ready  money  for  assured  incomes,  on 
the  other  are  thousand  of  borrowers  offering  to  exchange  the 
promise  of  assured  incomes  for  ready  money.  If  either 
of  these  classes  got  far  out  of  touch  with  the  prevailing  rate 
of  capitalization,  to  which  all  the  valuations  are  adjusted, 
that  class  would  lose  greatly. 

7.  All  the  net  usufructs  actually  yielded  ~by  wealth  are 
rents;  economic  time-discount  is  never  a  realized  income; 
it  is  merely  a  calculation  form,  or  anticipation  of  the  differ- 
ence between  present  and  future  gratifications.  There  has 
been  much  discussion  as  to  what  should  be  the  relations 
in  thought  between  rent  and  interest.  Space  permits  here 


§11]      ADJUSTMENT  OF  THE  RATE  OF  TIME-DISCOUNT     151 

only  an  indication  of  the  view  on  this  question  involved  in 
the  foregoing  treatment.  Rent,  as  the  term  is  here  applied, 
includes  all  the  net  productivity  attributable  to  the  owner- 
ship and  use  of  capital,  whether  the  yield  be  in  economic 
form  (in  an  increment  of  value)  or  in  contractual  form. 
Even  contract  money-interest  must  be  looked  upon  as  a 
species  of  the  genus  contract  rent,  the  peculiarity  in  the 
money  loan  being  merely  that  the  thing  which  it  is  agreed 
to  return  is  a  certain  number  of  units  of  the  standard  money. 

The  term  ' '  interest, ' '  first  applied  in  the  Middle  Ages  to  a 
payment  for  the  use  of  a  money  loan,  came  to  be  used  more 
broadly  by  the  earlier  economists  as  the  income  attributable 
to  those  goods  which  generally  were  bought  and  sold  in  terms 
of  money.  In  other  words,  interest  was  supposed  (though\  / 

erroneously)  to  be  uniquely  connected  with  the  particular  \       / 
production  instruments  to  which  the  term  capital  was  nar-     \   / 
rowly  and  mistakenly  confined.     Still  more  to  add  to  the       V 
confusion,  the  term  interest  was  about 'this  same  time  identi-       A 
fied  with  the  broad  problem  of  time-value.    The  terminology      /  \ 
has  remained  ever  since  in  this  stage  of  arrested  development.     /      \ 
Our  suggestion  is  to  retain  the  word  interest  in  its  original    /        \ 
meaning,   still   almost   universal   in   business   circles,    of   a    /          \ 
contractual  payment  on  money  loans,   applying  the  term  \ 

time-yalue  (for  lack  of  a  better  word)  to  the  subtler  eco- 
nomic problem. 

Time-value  is  here  understood  to  be  that  all-pervading  Rent  and 
difference  in  the  values  of  uses  and  gratifications  of  wealth  ^^Jj!8 
at  different  points  of  time.     A  comparison  of  the  value  of  tiaiiy differ- 
momently  appearing  uses  of  .wealth  is  the  rent  problem,   of  the  value 
Here   are,   therefore,   very  different   aspects   of   the   value  problem 
problem.     The  rent  conception  is  earlier  grasped  by  men, 
is  nearer  in  point  of  logic ;  the  concept  of  time-value  has 
only  recently  been  clearly  recognized.    If  men  lived  only  in 
the  moment,  they  would  be  concerned  only  with  rent ;  living 
in  the  future  also,  they  are  constantly  regulating  their  acts 
with  reference  to  time-value. 


CHAPTER  18 

RELATIVELY  FIXED  AND  RELATIVELY 
INCREASABLE    FORMS    OF    CAPITAL 


The  older 

modernwa 
of  viewing 


Free  goods 


§  I.      HOW   VARIOUS    FORMS    OF    CAPITAL    MAY   BE    INCREASED 

1.  Men  seek  to  increase  income   by  increasing   capital. 
^en  ma^  s^r^ve  ^°  increase  their  rents  without  expressing 
the  rent-bearer  in  terms  of  capital.     Peasant  owners  and 
small  proprietors,  toiling  fondly  on  their  little  estates,  seek- 
ing  steadily   a   larger   crop,    a   larger   income,    accomplish 
wonders  in  bringing  waste  land  to  a  high  state  of  cultivation. 
Working  on  the  soil  that  is  at  once  their  livelihood  and  their 
home,  they  do  not  consciously  reckon  the  value  of  the  labor 
they  are  putting  upon  it.     No  money  can  buy  that  which 
to  them  is  beyond  price.    But,  in  our  money  economy,  efforts 
are  largely  directed  toward  the  increase  of  the  capital  sum. 
Investment  takes  the  form  of  putting  in  a  sum  of  money 
in  the  hope  of  getting  an  income  bearing  a  certain  relation 
to  it.    The  first  thought  is  of  the  value  of  the  wealth  invested, 
which  has  been  carefully  measured  and  expressed  in  dollars 
and  cents.    Wealth  looked  at  in  the  older  way  was  valued  for 
what  it  did  immediately  for  its  owner,  for  its  concrete  fruits  ; 
looked  at  in  the  modern  way,  it  is  valued  as  a  marketable 
income-bearer  readily  convertible  into  a  multitude  of  other 
forms.    Thus  investments  come  to  be  thought  of  in  terms  of 
general  purchasing  power,   from  which   it  is   expected  to 
realize  an  income  of  a  given  percentage. 

2.  There  are  some  classes  of  goods  that  can  ~be  increased 
without  any  noticeable  increase  in  difficulty.    The  extremest 

152 


&l]  VARIOUS   MODES  OF   INCREASE  153 

examples  are  undiminished  goods  such  as  air,  sea-water, 
the  water  of  large  rivers.  These  are  free  goods  because, 
however  much  is  used,  the  supply  is  immediately  renewed. 
But  they  are  undiminished  only  in  a  relative  sense  and  in 
reference  to  present  need.  The  water  in  the  Western  rivers 
long  flowed  on,  undiminished  by  the  uses  made  of  it.  But 
progressing  civilization  required  more  water  for  cities,  for 
mining,  and  for  irrigation,  and  now  states  and  corporations 
are  going  to  law  over  these  formerly  undiminished  free 
goods.  Some  kinds  of  goods  are  produced  from  such  very 
common  materials  that  it  might  seem  possible,  by  the  sub- 
stitution of  agents,  to  produce  an  unlimited  supply.  How  Beginning 
can  bricks  be  limited  in  number,  being  made  as  they  are  Jjjjjjj]^ 
from  one  of  the  commonest  materials  on  the  earth 's  surface  ?  materials 
But  the  largest  clay  banks  are  limited  in  size;  a  large 
proportion  of  the  places  where  bricks  are  needed  are  not 
near  a  supply  of  clay  of  good  quality;  and  after  a  brick- 
yard has  been  used  for  a  time  there  is  increasing  difficulty 
in  getting  out  the  material.  While,  therefore,  bricks  are 
scarce  and  hard  to  get  from  the  outset  in  some  places,  the 
scarcity  grows  more  marked  in  many  places  at  first  well 
supplied.  If  materials  are  scarce  in  any  degree,  their  con- 
tinued use  for  one  purpose  increases  their  scarcity  in  all 
other  uses.  Economic  goods  are  goods  having  value;  value 
implies  scarcity,  and  an  increasing  demand  means  inevitably 
a  higher  value  at  some  point.  This  is  true  of  clay,  stone, 
water,  and  the  commonest  kinds  of  labor. 

It  has  long  been  customary  for  economists  to  talk  of  eco-  NO  scarce 
nomic  goods  that  could  be  increased  indefinitely   (meaning  f^n° 
infinitely  or,  in  any  event,  without  any  limit  ever  appreciable  increased 
to  man)  without  any  increase  in  the  cost  or  scarcity.     This 
class  of  goods  was  considered  to  be  very  large.    There  is  no 
such  class  of  economic  goods ;  it  is  evidently  impossible  that 
there  should  be.     If  they  are  already  "  scarce,"  increasing 
demand  must  make  them  scarcer.    There  are,  however,  some 
goods  that  practically  can  be  increased  with  so  little  diffi- 


154 


RELATIVELY  FIXED  FORMS  OF   CAPITAL 


[CH.  18 


The  prod- 
ucts of  land 
are  in- 
creased at  a 
given  time 


culty  that  their  limitation  is  not  of  great  social  importance. 
Progress,  population,  prosperity,  are  not  primarily  condi- 
tioned on  their  amount;  limitation  will  be  felt  far  earlier 
elsewhere.  They  are  at  one  end  of  the  scale;  they  are  the 
relatively  increasable  goods. 

3.  There  is  a  large  class  of  goods  whose  increase  is  seen 
to  be  gained  with  increasing  difficulty.     This  is  seen  most 
clearly  in  the  diminishing  returns  from  land.     In  the  at- 
tempt to  get  some  food-products  in  greater  quantity  from  a 
given  area  at  a  given  time,  increasing  difficulty  is  met  with 
at  once.    This  attempt  continued  for  a  series  of  years  results 
in  historical  diminishing  returns,  as  was  strikingly  illus- 
trated in  English  experience  during  the  Napoleonic  wars, 
when  wheat  rose  in  value  because  of  the  greater  difficulty 
of  producing  the  larger  supply  needed.     Some  replenishing 
agents  will  restore  themselves  if  given  time;  the  forest  will 
grow  up  if  left  untouched  by  man ;  the  field  will  recover  its 
fertile  quality  if  allowed  to  lie  fallow.    But  this  self -replen- 
ishing of  agents  is  a  slow  process,  and  time  is  costly.    Man 
therefore  tries  in  other  ways  to  force  more  uses  out  of  goods, 
until  checked  by  the  increasing  difficulty.    The  goods  subject 
to  "  the  law  of  increasing  cost,"  as  it  was  called  formerly, 
were  considered  to  be  a  peculiar  class  comprising  only  a 
small  portion  of  wealth.     But  it  can  now  be  seen  that  the 
law  may  apply  ultimately,  though  in  differing  degrees,  to 
every  kind  of  economic  goods.     Indeed,  the  principle  just 
discussed  is  no  more  than  one  phase  of  the  law  of  economic 
diminishing  returns,  which  has  a  universal  application  to  the 
realm  of  values. 

4.  There  is  a  class  of  goods,  natural  agents  and  stores  of 
materials,  which  appears  to  be  relatively  fixed  in  quantity 
or  which  is  increasable  only  with  much  difficulty.    The  first 
part  of  this  proposition  expresses  mildly  the  thought  that 
long  obtained  among  economists :  it  was  said  that  the  supply 
of  certain  things  was  absolutely  fixed,  the  chief  of  these 
being   land  used   for   agriculture.     The   idea  as  held   by 


§H]       SOCIAL  SIGNIFICANCE  OF  THESE  DIFFERENCES      155 

Malthus  and  Ricardo  was  modified  by  John  Stuart  Mill  in 
somewhat  inconsistent  ways.  Land,  it  was  said,  is  a  thing 
which  "  man  cannot  make/'  therefore  its  supply  is  fixed. 
The  second  part  of  the  opening  proposition  expresses  the 
view  here  held:  the  supply  of  no  important  class  of  goods 
is  absolutely  fixed,  in  any  reasonable  sense.  Most,  if  not  all, 
belong  to  the  class  that  is  increasable,  although  it  may  be 
with  much  difficulty.  Even  when  the  exact  thing  cannot/ 
be  duplicated,  as  a  bust  by  an  ancient  sculptor  or  an  auto-/ 
graph  of  a  dead  author,  many  substitutes  serving  the  samej 
or  closely  related  wants,  affect  and  limit  the  demand,  and 
thus  increase  the  supply.  Men  cannot,  it  is  true,  increase 
the  stores  of  copper  in  the  earth,  but  they  devise  new 
processes  to  extract  it  from  ores  before  worthless,  and  invent 
methods  of  procuring  aluminium,  which  yields  some  of  the 
same  utilities  as  copper.  Even  the  supply  of  land,  as  is 
shown  elsewhere,  is  constantly  changing.  Thus  all  kinds 
of  wealth  can  be  increased  in  some  degree;  many  kinds  in 
the  course  of  time  are  very  greatly  increased  with  little  or  no 
direct  effort,  but  the  supply  of  all  alike  can  be  secured  in 
larger  amount  at  any  given  moment  only  at  the  cost  of 
increasing  difficulty. 

§  II.      SOCIAL  SIGNIFICANCE  OF  THESE  DIFFERENCES 

1.  Not  the  fixity  of  the  physical  amount  of  agents,  but  the  physical 
economic  supply  is  significant.  There  is  danger  of  confu- 
sion  between  these  two  ideas.  The  statement  that  "land"  supply 
cannot  be  created  and  that  therefore  "the  supply  is  fixed" 
involves  a  fallacy.  The  word  supply  means  the  amount  that 
is  available  at  the  moment  or  during  the  period  spoken  of. 
The  land  in  Greenland  is  not,  and  probably  never  can  be,  a 
part  of  the  supply  of  land  in  England.  The  land  in  Amer- 
ica for  centuries  was  not,  but  now  has  become,  for  some 
purposes,  a  part  of  the  supply  in  the  same  market  as  the 
land  of  England.  The  question  of  importance  in  economic 


156 


RELATIVELY  FIXED  FORMS  OF   CAPITAL 


[CH.  18 


discussion  is  not  whether  the  physical  material  can  be 
brought  into  existence,  but  whether  the  economic  "supply" 
can  be  increased.  The  existence  of  coal-mines  in  Venus 
or  Mars  is  of  no  economic  importance  to  us,  but  coal-mines 
on  the  earth,  yet  undiscovered,  present  a  potential  supply 
that  at  any  moment  may  be  realized. 

2.  Discovery  of  new  lands  and  of  new  natural  deposits 
continually  enlarges  the  economic  supply  of  the  agents  most 
nearly  fixed  in  physical  amount.     This  proposition  states  a 
historical   fact.     Any  explanation  of  the   economic  occur- 
rences of  the  last  five  centuries  or  of  the  immediate  future, 
that  ignores  this  fact  of  the  increasing  supply  of  many 
kinds  of  land  and  natural  resources  in  the  markets  of  the 
civilized  world,  must  lead  to  false  conclusions.     The  rate  of 
this  movement  has  been  more   rapid  in  the   past  century 
than  theretofore,  and  perhaps  more  rapid  than  it  will  be 
henceforward;  but  that  this  development  will  continue  in 
large  measure  and  for  a  long  period,  is  not  open  to  question. 
Undeveloped  areas  will  be  opened  to  the  world,  and  new 
geologic  realms  will  be  explored.     Yet  the  notion  criticized 
above  is  found  in  all  the  older  text-books.     The  idea  arose 
in  England  in  the  first  quarter  of  the  nineteenth  century 
when  land  and  food  were  rapidly  rising  in  price,  and  it  has 
vitiated  a  large  part  of  both  the  economic  theory  and  the 
practical  conclusions  on  this  subject. 

3.  Invention,  including  new  modes  of  transportation  and 
new  processes,  increases  the  economic  supply  of  most  scarce 
goods  and  provides  substitutes  for  the  others.    Some  inven- 
tions  increase   economic   supply  by   making   available   the 
uses  in  goods  that  were  before  unavailable.    Subsoil  plough- 
ing annexes  to  agricultural  land  new  layers  of  soil  that  are 
just  as  important  as  new  acres  added  to  the  surface.     If 
land  could  be  used  three  times  as  deep,  it  would  be  as  good 
for  many  purposes  as  if  it  were  of  three  times  the  extent. 
New  trade  routes  and  new  means  of  transportation  add  to 
the  supplies  available  in  the  older  countries  as  effectively 
as  if  their  areas  were  increased.     The  building  of  railroads 


*H]       SOCIAL   SIGNIFICANCE   OF   THESE   DIFFERENCES       157 

in  western  America  had  an  effect  on  English  rents  identical 
in  nature  with  that  which  would  have  been  produced  had  an 
equal  area  of  somewhat  less  fertile  land  touching  England, 
risen  out  of  the  ocean.  Every  country  in  Europe  has  re- 
peatedly felt  the  shock  of  these  great  economic  changes 
which  have  compelled  the  recapitalization  on  a  lower  plane, 
of  nearly  all  kinds  of  their  landed  wrealth.  Where  the  samel 
agents  have  not  been  multiplied,  substitutes  have  been  found  | 
that  are  just  as  effective  in  meeting  the  economic  need.  It 
is  the  result,  the  gratification,  that  man  seeks :  any  particular 
good  is~Tmt  the  means  to  an  end. 

4.  ^Increasing  wealth  and  new  labor  make  possible  the  Production 
increase  of  the  agents  that  appear  most  nearly  fixed  in  physical7 
supply.  When  the  need  arises  men  turn  to  new  enterprises,  change 
The  reclaiming  of  land  in  Holland  is  a  striking  but  far 
from  isolated  example.  Among  the  larger  undertakings 
of  this  kind  are  the  draining  of  the  Haarlem  Lake  in 
1840-58,  by  which  40,000  acres  of  rich  land  were  made  avail- 
able, and  the  draining  of  the  Zuyder  Zee,  which  is  adding 
1,300,000  acres.  Though  there  have  been  many  minor  un- 
dertakings of  the  kind,  the  area  reclaimed  is  relatively  small 
compared  with  the  whole  area  of  the  land  in  the  world  used 
for  agricultural  purposes.  There  are  still  great  areas  of  fens, 
swamps,  and  marshlands,  such  as  those  on  the  Jersey  coast 
in  this  country,  which  with  moderate  effort  could  be  re- 
claimed. While  the  possibility  must  be  recognized,  the  in- 
crease of  the  area  of  available  agricultural  land  by  means 
of  such  physical  changes  is  relatively  small. 

The  work  of  the  pioneer,  as  a  producer  of  a  supply  of  And  by  the 
land,  is,  however,  of  the  greatest  importance.     The  pioneer  J™eers 
annexes  new  areas  to  the  economic  world  and  to  the  market 
in  which  he  has  lived.    This  is  recognized  of  late  by  writers 
that  perhaps  do  not  fully  mark  its  significance  to  economic 
theory.    The  work  of  the  explorer  and  prospector  is  that  of 
a  producer  of  mineral  resources,  and  daily  market  quota- 
tions reflect  the  changes  in  "  the  supply  "  of  these  natural 
stores. 


158 


RELATIVELY  FIXED  FORMS  OF   CAPITAL 


[OH.  18 


Successive 
utilization 
of  various 
grades  of 
agents 


Goods 

ranged  on  a 
scale  of  in- 
creasable- 


5.  Limitation  of  the  supply  appears  first  in  the  better 
qualities,  and  efforts  to  increase  wealth  are  then  directed  to 
making  available  the  poorer  grades.  Great  quantities  of  the 
poorer  grades  of  wealth,  even  of  those  things  that  are  rel- 
atively fixed  in  supply,  lie  unused.  Great  areas  on  the  edge 
of  civilization  still  await  the  pioneer,  the  prospector,  and  the 
miner.  Here  is  a  source  of  wealth  and  a  field  for  enterprise. 
The  growth  of  society  may  cause  some  of  the  poorer  agents 
in  time  to  become  the  best.  When  men  crossed  the  ocean 
to  settle  on  Manhattan  Island,  it  was  a  wilderness;  but  the 
growth  of  commerce  has  caused  the  land  in  New  York  city 
to  become  more  valuable  than  that  in  London.  Changes 
are  still  in  progress,  for  of  late  the  smaller  ports  to  the  south 
have  increased  their  trade  at  a  more  rapid  pace  than  New 
York  has. 

The  difference  in  increasableness  of  the  various  forms  of 
wealth  is  of  importance  in  considering  various  social  ques- 
tions such  as  the  effects  of  an  increase  of  population,  and  the 
kinds  of  taxation  most  equitable  and  most  favorable  to  the 
progress  of  society.  {  Account  must  be  taken  of  the  fact  that 
the  number  of  bricks  can  be  increased  more  easily  than  the 
amount  of  land;  but  there  must  not  be  overlooked  the  pos- 
sibility of  increase  in  any  of  these  forms  of  wealth,  nor 
the  limits  to  the  increase  of  any  one  of  them.  When  one 
wishes  to  save  or  increase  wealth,  he  turns  to  these  great  un- 
appropriated fields,  unused  things  or  things  imperfectly 
used,  and  tries  to  convert  them  into  effective  agents.  The  dif- 
ferent forms  of  wealth  may  be  ranged  on  a  scale  according  to 
the  ease  with  which  they  can  be  increased  by  effort.  They 
may  therefore  be  classed  as  relatively  fixed  and  relatively  in- 
creasable.  Some  natural  resources  belong  at  one  end,  and 
some  at  the  other  end  of  this  scale.  No  hard  and  fast  line 
divides  the  different  kinds  of  goods,  but  the  difference  in 
degree  of  increasableness  is  a  fact  of  great  social  import- 
ance, affecting  the  direction  in  which  industry  can  and  must 
progress. 


CHAPTER  19 

SAVING    AND    PRODUCTION    AS    AFFECTED    BY 
THE    RATE    OF    INTEREST 

§  I.   SAVING  AS  AFFECTED  BY  THE  INTEREST  RATE 

1.     In  the  case  of  consumption  goods,  present  marginal  The  interest 
uses  are  often  less  than  future  uses  as  judged  at  the  present.  rate  traces 

the  division 

The  proposition  that  future  goods  sometimes  have  a  greater  between 
instead  of  a  less  value  than  present  goods  may  at  first  seem  j£tureta°d 
to  deny  the  general  fact  of  economic  interest,  which  is  a  gratmca- 
premium  on  present  over  future  goods.     The  contradiction  tions 
is  only  apparent,  however,  and  the  proposition  is  merely  a 
proper  interpretation  of  the  theory  of  interest.     The  asser- 
tion that  present  goods  have  greater  value  than  future  goods, 
as  we  have  accepted  it,  requires  two  explanations.     First, 
it  means  that  this  difference  exists  when  the  two  are  judged 
and  compared  at  the  present  moment.    The  future  use  when 
it  matures  may  be  much  greater  than  the  present  use;  in- 
deed, the  very  existence  of  interest  depends  upon  this  surplus 
of  value  arising  by  the  lapse  of  time  in  the  future  use. 
Secondly,  the  proposition  does  not  mean  that  every  concrete 
good,  or  every  use  of  the  goods,  is  worth  more  in  the  present 
than  in  the  future;  it  means  merely  that  the  demand  for 
present  goods  preponderates  so  that  a  market  rate  in  favor 
of  present  possession  prevails.    In  a  great  many  cases  a  par-  ' 
ticular  good  may  have  a  greater  value  to  be  kept  for  the 
future  than  to  be  used  at  present,  in  which  case  it  is  kept, 
or  it  is  exchanged  for  something  else  having  a  higher  value 
in  the  present.    But  this  preference  of  the  future  over  the 

159 


160 


SAVING  AND  THE  INTEREST  RATE 


[CH.  19 


present  cannot  pass  a  moderate  limit  without  condemning 
the  person  to  present  misery,  and  at  length  to  death.  On  the 
other  hand  the  excessive  preference  of  present  over  future 
would  lead  to  the  using  up  and  wearing  out  of  wealth,  to  the 
present  enjoyment  of  every  possible  resource,  on  the  penalty 
of  future  misery.  Evidently  somewhere  between  these  two 
extremes  there  must  be,  in  each  economy,  a  ratio  of  exchange 
between  present  and  future,  which  in  fact  is  the  interest 
2_rate.  This  rate  applied  to  utilities  traces  through  each  good 
a  line  analagous  to  the  isothermal  line  on  the  map,  marking 
off  a  zone  of  utilities  for  the  present  and  other  zones  for  each 
period  of  the  future.  There  is  thus  a  close  relation  between 
saving  and  the  rate  of  time-discount. 

Let  us  illustrate  by  the  case  of  fruit  stored  in  the  cellar 
for  future  use.  In  the  fall  after  the  appetite  for  apples 
has  been  gratified  up  to  a  certain  point,  there  still  remains 
a  large  stock  which  affords  less  gratification  if  consumed  at 
once  than  if  kept  for  a  time.  Thus  wood,  food,  and  clothing 
are  stored  in  the  summer  for  the  winter's  need.  Even  the 
animals  act  on  this  principle.  Squirrels,  bees,  and  ants  store 
up  in  the  season  of  superfluity  for  the  season  of  scarcity. 
The  animals  recognize  with  their  feeble  intelligence  or  by 
instinct,  that  a  time  will  come  when  these  consumption  goods 


V 

i  \ 

VNOW                                                                          !          \  A^e°;^nc* 

X 

\ 

IN 

N^ 

v                                                         ;  \ 

I     X                                                                                                                                         1                                                             V.          . 

!       Nv                  Present  VALUE    lint                     ^ 

r--r  |--H 

Volu 

of  G 

ods  f« 

Pre<u 

ntUse 

F  V                                     f 

Vol-eo 

Gooe 

t  Now 

1    N 

I         X 

x 

O.J>K 

^ 

^ 

G< 

odauj 

ed  tor 
/Vont 

Pre»«r 

t 

WH.M|I^V; 

1    Xs 

'*% 

VX 

{X 

X 

__] 

X 

'                   3              .»              J              «              7              8              9              •«             "              <*                                70 

/«      »      •« 

will  represent  greater  importance  to  their  welfare  than  they 
do  at  the  moment.    It  results  from  the  nature  of  wants  and 


§  IJ        SAVING  AS  AFFECTED  BY   THE  INTEREST   RATE     161 

the  principle  of  diminishing  utility  that  in  many  cases  some 
portion  of  a  large  supply  of  present  goods  must  be  worth  less 
now  than  at  a  future  time.  This  part,  the^  marginal,  less 
necessary  part,  will  be  left  for  a  future  time,  and  it  is  to  thTs 
part  that  our  opening  proposition  refers.  This  is  roughly 
illustrated  by  the  diagram. 

Things  that  cannot  be  kept,  perishable  goods,  do  not  per- 
mit of  this  comparison.  But  if  goods  that  can  be  kept  con- 
tinue to  be  used  after  utility  has  fallen  down  the  scale,  their 
high  value  for  the  future  is  cast  away.  Man  lives  not  alone^ 
in  the  present  but,  in  a  far  greater  measure  than  do  any  ani- 
mals, he  lives  in  the  future  also.  His  economic  life  and  his 
economic  judgment  comprehend  a  great  number  of  periods 
at  once.  With  the  aid  of  memory  and  imagination  he  fore- 
casts the  future,  and  compares  it  with  the  present.  The 
diminishing  utility  of  goods,  therefore,  is  modified  by  this 
fact  that  a  thing  has  want-gratifying  power  at  different 
periods.  Before  man  uses  goods  for  an  inferior  purpose  he 
will  ask  whether,  if  they  are  kept  for  the  future,  they  will  , 
not  gratify  a  greater  want. 

2.     The  gradual  rise  of  a  consumption  good  with  the  lapse  The  less 
of  time  from  the  lower  to  the  higher  degree  of  gratification  JJJe^vaiue 
is  the  rent  it  yields.    The  difference  in  value  of  present  and  with  the 
future  rents  is  expressed  by  the  discount  of  the  future  use  topse' 
when  it  is  capitalized  at  any  earlier  moment,  and  emerges 
in  the  rise  in  value  as  the  thing  approaches  to  the  time  when 
it  can  render  the  later  use.    Next  year  the  unit  whose  use  is 
deferred  will   afford   as   much   gratification   as   the   earlier 
units  do  now,  and  more  than  if  used  at  the  present  moment. 
The  importance  of  any  present  utility  is  compared  with  its 
importance  a  year  later,  plus  interest  at  a  rate  which  ex- 
presses the  limit  to  which  future  uses  are  discounted.    Any- 
thing that  makes  men  feel  more  the  importance  of  future 
uses  causes  them  to  value  those  uses  more.    But  the  pressure 
of  present  want  is  such  that  a  present  use  of  a  lower  order 
competes  with  a  future  use  of  a  higher  order.   Only  goods  of 
11 


162 


SAVING  AND   THE  INTEREST   BATE 


[CH.  19 


Interest  is 
the  equal- 
izer of  time 
values 


a  lower  order,  nearer  the  margin,  are  reserved  for  the  future. 
But  just  as  the  possibility  of  using  a  thing  for  several  dif- 
ferent purposes  at  present  causes  it  to  be  valued  more  highly 
than  if  it  had  but  one  use,  so  the  possibility  of  reserving  to 
the  future  a  portion  of  a  stock  imparts  to  every  unit  a  higher 
marginal  utility. 

3.  The  saving  of  present  goods  for  future  use  is  encour- 
aged by  the  motive  of  gaining  the  interest.    Many  consump- 
tion goods  grow  into  higher  uses  in  the  hands  of  the  owner, 
whether  he  uses  them  for  himself  or  not.    Ice  may  be  stored 
in  midwinter  when  it  is  all  but  a  free  good  and  a  little  labor 
serves  to  fill  the  ice-house.    Kept  until  the  summer  months, 
the  ice  rises  in  value  as  the  desire  for  it  grows.     Likewise 
the  higher  price  secured  by  the  owner  of  a  thing  kept  for 
sale  to  others,  reflects  the  change  in  utility,  and  affords  prac- 
tically a  rent  which  is  the  motive  for  investing  capital  in 
that  business.     Any  saver  or  abstainer  puts  aside  present 
wants  only  when  the  future  good,  with  the  addition  of  time- 
value  or  of  money  interest,  appears  as  large  as  the  present 
good.     Interest  is  therefore  the  equalizer  of  the  value  of 
things  in  different  periods.     Put  into  the  scale  of  judgment 
when  present  and  future  are  compared,  it  helps  to  balance 
the  disparity  in  the  gratifications  given  by  economic  goods 
in  different  periods  of  time. 

4.  The  postponement  of  present  wants  results  in  better- 
ing the  economic  environment  for  the  future.     Economic 
environment  means  simply  the  economic  conditions  in  which 
men  live,  the  stock  of  wealth,  the  supply  of  useful  things 
with  which  they  are  surrounded.     This  betterment  may  be 
only  temporary,  only  for  the  immediate  future.     Like  the 
busy  bee  or  the  prudent  ant,  one  may  in  summer  store  the 
cellar  with  consumption  goods  to  be  consumed  the  following 
winter.    But  often  there  is  a  more  lasting  way  of  improving 
the  economic  environment  by  converting  savings  into  du- 
rable indirect  agents.     The  accumulation  of  wealth  that  will 
yiel^  its  fruits  only  after  years  of  growth  is  the  record,  so 


§n]  CONDITIONS  FAVORABLE  TO  SAVING  163 

to  speak,  of  the  successful  competition  of  forethought  with 
present  desires.  It  means  that  the  two  periods  have  pre- 
sented their  respective  claims  and  that  men  have  decided 
in  favor  of  the  future.  Saving  thus  lifts  society  from  pov- 
erty to  wealth  by  the  progressive  enlargement  of  the  sources 
of  future  utilities. 

5.  Abstinence  is  the  faculty  of  mind  that  enables  present 
wants  to  be  subordinated  to  future  wants.  Abstinence  may  abstinence 
be  considered  as  a  quality,  or  faculty,  of  the  mind,  or  as  an 
act  resulting  from  that  quality.  There  is  little  danger  of 
confusion  in  this  usage,  but  it  is  well  to  note  the  distinction 
and  the  fact  that  the  former  is  the  primary  meaning.  Ab- 
stinence expresses  an  act  of  the  will,  a  choice  made  by  man. 
It  is  the  guardian  of  the  future,  so  to  speak,  against  the 
greediness  of  the  present.  For  convenience  we  may  speak 
of  conservative  abstinence  as  that  which  keeps  men  from 
using  up  or  invading  their  present  stock  of  resources,  and  of 
cumulative  abstinence  as  that  which  impels  them  to  add  to 
that  stock.  There  is  no  sharp  dividing  line,  no  abrupt  break, 
between  these  two,  yet  on  the  whole  they  differ.  There  is  a 
quality  of  mind  very  like  the  inertia  or  momentum  of  phy- 
sical matter.  The  inertia  of  mind  makes  men  resist  stub- 
bornly the  reduction  of  wealth  and  of  inherited  social  posi- 
tion ;  but  it  requires  a  more  positive  quality  of  mind  to  add  to 
wealth  at  the  cost  of  present  sacrifice.  Abstinence  is  em- 
bodied in  individuals,  never  elsewhere,  and  is  found  in  most 
varying  degrees  of  strength.  Upon  it  depends  the  growth 
and  betterment  of  man's  environment. 

§  II.      CONDITIONS    FAVORABLE    TO    SAVING 

1.     Political  security  and  domestic  order  are  essential  to  political  in- 
the  development  of  saving.     As  saving  results  from  a  com- 
parison  of  the  future  with  the  present,  any  lack  of  certainty  saving 
regarding  the  future  decreases  the  appeal  it  makes.     Men 
employ  roughly  the  theory  of  probabilities  in  this  matter, 


164 


SAVING  AND  THE   INTEREST   RATE 


[CH.  19 


and  count  a  utility  only  half  as  much  when  there  is 
but  one  chance  in  two  of  enjoying  it.  In  countries  where 
there  are  constant  revolutions  and  border  wars,  as  in  Africa 
and  South  America,  and  in  lands  where  brigandage  is  com- 
mon, as  in  Italy,  Macedonia,  and  Bulgaria,  the  motive  for 
saving  is  cut  in  two.  Oppressive  and  irregular  taxation  kills 
the  motives  of  providence,  and  decreases  the  appeal  made  by 
the  future.  While  the  miserable  subjects  of  the  st^e  live 
from  hand  to  mouth,  the  very  sources  of  the  public  revenue 
disappear.  Improvidence  grows  upon  such  a  people  into  a 
prevailing  national  custom;  ambition  is  wanting;  industry 
is  the  sport  of  chance;  economic  order  and  economic  pros- 
perity are  impossible. 

2.  Social  institutions  that  give  a  motive  to  the  individual 
are  essential  to  saving.     Among  these  institutions  the  most 
important  are  the  family  and,  closely  connected  with  it,  the 
institution  of  private  property  which,  in  its  ideal  manifesta- 
tion, places  the  responsibility  for  economic  welfare  on  the 
individual  or  the  family.     Through  it  the  state  says  to  men : 
' '  Save  if  you  will ;  the  wealth  and  its  fruits  shall  be  yours. 
But  if  you  spend  and  consume  all  you  can,  you  alone  will 
suffer  the  consequences."     It  is  true  that  the  institution 
of  private  property  never  is  found  in  an  ideal  form.     Dis- 
honest public  officials  weaken  and  defeat  its  benefits.    Every 
propertyless  family  marks  a  failure  in  its  purpose.  (Private 
property  is  a  favorite  object  of  attack  by  social  reformers, 
but  it  never  can  be  safely  abolished  in  a  civilized  state 
until  some  other  incentive  is  provided,  equally  effective  to 
make  men  subordinate  present  desires  to  future  welfare. 
Unless  the  mass  of  men  can  be  greatly  changed,  property 
creates  the  only  motive  that  can  induce  saving  regularly 
and  on  a  large  scale.     It  diffuses  responsibility  for  present 
consumption.     It  multiplies  the  motives  for  abstinence  and 
thus  increases  the  welfare  of  all  economic  society^ 

3.  Opportunity  for  the  investment  of  small  savings  fa- 
vors a  spirit  ef  abstinence.     The  institution  of  small  prop- 


§IIJ  CONDITIONS  FAVORABLE  TO  SAVING  165 

erty,    peasant   proprietorship,    worked    powerfully    in    this   safe  and 
direction  in  many  parts  of  Europe,  and  the  same  effects  have   paying  in~ 
resulted  in  America  from  the  wide  diffusion  of  property   encourage 
in  land.     If  the  decline  in  the  number  of  small  independ-   savins 
ent    farmers    has    somewhat    weakened    this    influence    in 
America,  in  other  ways  other  agencies  are  effectively  per- 
forming the  same  functions.     Savings-banks,  penny  banks, 
building  and  loan  associations,  penny-provident  funds,  and 
other  convenient  means  of  investing  small  sums,  encourage 
men  to  reduce  their  tobacco  bills,  their  candy  bills,  their 
saloon  bills,  and  to  lay  aside  for  the  winter's  coal,  for  the 
children's  education,  for  houses,  for  business  investments,  or 
for  old  age.    Probably  no  one  thing  has  given  a  greater  stim- 
ulus to  saving  than  has  the  development  of  insurance  and  the 
endowment  policies  in  connection  with  it.     While  the  great 
modern  corporations  have  destroyed  many  of  the  small  busi- 
ness enterprises  into  which  so  much  of  the  saving  of  the  past 
was  put,  at  the  same  time  the  increase  of  negotiable  paper, 
of  loans,  and  of  stock  in  joint-stock  companies,  has  opened  up 
other  large  fields  for  investors. 

4.  Variations  in  the  rate  of  discount  of  the  future  react  changing 
upon  the  spirit  of  saving  in  various  ways.  This  very  general  !*^J5™ 
proposition  requires  more  detailed  discussion.  In  general,  to  saving 
a  high  rate  of  interest  gives  a  large  motive  to  save,  for  as  the 
discount  on  the  future  is  large,  so  is  the  reward  for.. waiting. 
But  this  favoring  motive  may  be  offset  by  other  unfavorable 
conditions,  and  is,  in  fact,  wherever  the  high  rate  continues. 
In  countries  backward  economically,  where  war,  brigand- 
age, and  political  oppression  prevail,  the  rate  of  interest 
is  frequently  ten  and  twelve  per  cent,  on  the  best  secured 
loans.  A  high  interest  rate  does  not  of  itself  insure  a  high 
degree  of  cumulative  abstinence;  it  is  only  one  of  several 
factors.  But  in  a  new  and  favored  country  like  America, 
a  high  rate  of  interest  is  a  strong  stimulus  to  saving.  Again, 
interest  may  fall  while  saving  continues  at  the  same  or  a 
greater  pace.  Ordinarily  a  fall  from  six  per  cent,  to  five, 


166 


SAVING  AND  THE  INTEREST  BATE 


[OH.  19 


giving  men  a  smaller  motive  for  abstinence,  would  be  ex- 
pected to  cause  less  saving,  yet  this  is  not  always  the  case. 
Custom  and  example  help  to  fix  a  habit  of  saving  i 
individuals  and  cause  them  to  continue  saving  at  a  lower 
rate  of  interest.  With  the  growth  of  wealth,  the  prevailing 
ideas  as  to  the  amount  needed  for  a  competence  change,  im- 
pelling to  greater  saving.  The  tendency,  however,  of  a  fall 
in  the  rate  of  interest  is  to  weaken,  and  that  of  a  rise  of 
the  rate,  other  things  being  equal,  is  to  strengthen  the  motive 
to  save.  But  the  influence  of  the  interest  rate  on  saving  is 
relative  to  the  character  of  men. 


§  III.       INFLUENCE    OF    THE    INTEREST    RATE    ON    METHODS    OF 
PRODUCTION 

1.  The  individual  saver  is  enabled  to  improve  the  agents 
that  he  uses.    The  simplest  case  is  presented  when  means  of 
enjoyment  are  improved  and  made  more  durable.    If  Crusoe 
on  his  island  spends  'less  time  and  fewer  resources  on  grat- 
ifying his  immediate  wants,  he  may  improve  the  quality  of 
his  clothing  and  the  convenience  of  his  house  and  furniture. 
By  thus  putting  his  consumption  goods  into  durable  instead 
of  temporary  forms,  he  will  increase  eventually  the  sum  of 
utilities  enjoyed.    Again,  abstinence  permits  the  tools  of  the 
laborer  to  be  made  more  convenient.     If  the  farmer  spends 
less  time  in  the  garden  and  he  and  his  family  live  on  plainer 
food,  while  he  makes  a  plow,  mends  a  rake,  and  builds  a 
shed,  he  will  be  enabled  thereafter  to  gather  a  greater  crop 
with  less  effort. 

2.  Consumption  goods,  when  saved,  may  be  exchanged 
for  services,  and  these  may  be  used  to  create  durable  agents. 
Various  ways  are  open  to  one  wishing  to  increase  his  stock 
of  durable  agents.     He  may  forego  seeking  immediate  en- 
joyments while  he  makes  durable  agents  himself.     Or  he 
may  make  and  save  a  stock  of  consumption  goods,  a  surplus 
supply  for  the  future,  and  exchange  it  for  durable  agents. 


III] 


PRODUCTION   AND   THE   INTEREST   RATE 


167 


Finally,  one  who  has  accumulated  consumption  goods  can 
always  exchange  them  for  the  services  of  those  seeking 
subsistence  and  enjoyment;  and  thus  in  control  of  a  labor 
force,  he  can  direct  it  toward  the  production  of  new  forms 
of  productive  agents. 

3.  In  modern  industry,  saving  frequently  takes  the  form 
of  money,  which  is  then  loaned  to  productive  borrowers. 
This  is  the  typical  form  of  saving  in  modern  industry.  As 
it  is  more  and  more  the  case  that  income  takes  first  the  form 
of  money,  saving  most  conveniently  takes  the  money  form. 
The  clerk  on  a  salary  of  $60  a  month  spends  $50  and  saves 
$10  which  he  lends  to  a  neighbor  or  deposits  in  a  savings- 
bank.  The  borrower  is  thus  empowered  to  increase  his  stock 
of  productive  agents  in  the  measure  that  the  lender  has 
limited  his  consumption.  The  complexity  of  the  process  by 
which  money  saving  becomes  embodied  through  a  money  loan 
in  new  productive  agents  should  not  blind  to  its  real  nature. 
The  money  is  saved  as  a  means  to  the  exchange  of  present 
goods  for  future  income.  Money  even  in  our  day  is  occasion- 
ally stored  away  for  future  use  under  hearthstones  or  in 
old  stockings  and  hollow  trees,  but  this  is  a  primitive  and 
wasteful  method,  involving  the  loss  of  all  the  additional 
rents  that  its  exchange  and  investment  would  yield. 

If  the  money  saved  by  the  thrifty  saver  is  loaned  to  a 
thriftless  borrower,  wealth  is  not  increased,  but  merely 
changes  hands.  The  prodigal  mortgaging  his  wealth,  spend- 
ing the  money,  and  living  beyond  his  income,  absorbs  the 
savings  of  the  other.  One  saves  and  adds  to  wealth,  the  other 
consumes  it.  There  is  no  net  increase  of  goods,  but  two 
individuals  have  shifted  positions;  each  has  gotten  his  re- 
ward of  growing  affluence  or  penury. 

The  ' '  normal  ' '  end,  however,  of  savings  and  loans  is  pro- 
ductive. The  borrower,  in  getting  control  of  purchasing 
power,  aims  to  put  a  new  machine  where  it  will  be  useful, 
to  remove  obstacles,  and  to  make  economic  agents  more 
effective.  Along  the  border-land  of  industry  the  active  and 


Money 
savings  are 
converted 
into  other 
wealth 


168 


SAVING  AND   THE  INTEREST   BATE 


[CH.  19 


alert  borrower  seeks  out  opportunities  to  make  new  agents 
earn  a  rental,  and  having  found  the  opening,  turns  to  the 
money  market  for  the  means  to  profit  by  it. 

4.  A  fall  in  the  rate  of  interest  normally  accompanies 
an  increase  in  the  mass,  efficiency,  and  valuation  of  durable 
economic  agents.  A  lower  rate  of  interest  means  a  higher 
capitalization  of  all  incomes.  It  is  not  that  either  can  be 
called  the  cause  of  the  other;  rather  both  are  aspects  of  the 
same  thing,  the  interest  rate  merely  registering  the  change 
in  capitalization.  If  the  rate  of  interest  has  been  five  per 
cent.,  an  income  of  $100  has  been  capitalized  at  $2000. 
When  the  rate  falls  to  four  per  cent,  the  income  is  recapital- 
ized at  $2500.  All  along  the  line  of  investment  there  is 
an  increase  in  the  value  of  the  durable  economic  agents. 

Another  phase  of  the  change  is  the  greater  complexity  of 
the  processes  of  industry.  Production  becomes  technically 
more  complex  when  interest  falls.  Rental,  product,  and  pres- 
ent goods,  bear  a  smaller  ratio  to  the  value  of  capital,  and 
therefore  it  becomes  advantageous  to  apply  newly  formed 
capital  to  uses  which  before  did  not  justify  the  investment. 
Where  formerly  the  utility  of  a  second  tool  did  not  justify 
its  making,  now  it  can  be  made  to  earn  the  smaller  rental 
needed  to  balance  its  capital  value.  One  form,  therefore, 
which  the  change  takes,  is  a  multiplication  of  the  tools  al- 
ready used.  Things  are  placed  wherever  most  convenient. 
Another  form  this  change  takes  is  the  putting  of  new  links 
into  the  chain  of  technical  production.  Cost  of  operation 
constantly  is  compared  with  fixed  charges,  the  interest  with 
the  capital  investment.  Expensive  improvements  on  rail- 
roads, the  straightening  of  curves,  the  tunneling  of  moun- 
tains, the  reducing  of  grades,  the  replacement  of  lighter  by 
heavier  rails,  have  been  made  possible  by  a  fall  in  the  rate 
of  interest.  A  fall  in  the  rate  of  interest  disturbs  the 
equilibrium  that  has  been  arrived  at,  between  the  cost  of 
operation,  the  amount  paid  for  wages,  coal,  etc.,  and  the 
income  on  permanent  investment.  If  the  rate  of  interest 


§m]  PRODUCTION  AND   THE   INTEREST   RATE  169 

has  been  five  per  cent,  and  falls  to  four  per  cent,  many 
permanent  improvements  before  unwise  become  economical. 
One  thousand  dollars  paid  annually  in  wages  then  balanced 
an  interest  charge  on  a  capital  investment  of  $20,000;  now 
it  balances  the  interest  charge  on  $25,000.  It  becomes  a 
paying  thing  for  the  railroad  to  abandon  or  throw  aside  an 
enormous  capital  represented  by  the  old,  less  perfect  road- 
bed, and  build  a  new  one  alongside  of  it.  The  changes  of  this 
kind  one  sees  in  traveling  on  the  great  and  progressive  rail- 
roads, reflect  in  part  the  growth  of  traffic,  but  in  part  also 
a  change  of  the  interest  rate,  making  it  a  net  saving  to 
increase  the  capital  investment  in  order  to  reduce  the  cost 
of  operation  per  unit  of  traffic. 

The  benefits  of  saving  viewed  broadly  are  not  confined   Diffused 
to  the  owner  of  the  wealth  saved,  but  are  diffused  throughout   ^^s 
society,  in  the  degree  that  they  increase  and  improve  the 
industrial  environment,  and  thus  raise  the  efficiency  of  pro- 
duction.    Such  a  change  works  the  same  results  as  would 
a  magical  increase  in  the  fertility  of  the  soil,  an  improvement 
in  the  richness  and  accessibility  of  natural  mineral  stores, 
or  in  the  quantity  and  quality  of  artificial  appliances. 


PART  II 
THE  VALUE  OF  HUMAN  SERVICES 


PART  II 
DIVISION  A-LABOR   AND   WAGES 

CHAPTER  20 
LABOR   AND    CLASSES    OF   LABORERS 

§  I.      RELATION  OF  LABOR  TO  WEALTH 

1.     Labor  is  any  human  effort  having  an  aim  or  purpose  work  and 
outside  of  itself.     It  is  difficult  to  define  satisfactorily  the  P^y^11* 
term  labor.     No  definition  will  quite  mark  off  all  the  cases,   tinguished 
The  efforts  put  forth  by  men  may  be  classified  according  as 
they  are  pleasant  in  themselves,  and  according  as  they  have 
separable  useful  results.    These  two  factors  combine  to  form 
four  groups  of  actions. 

Effort  Objective  result  sought  Name  of  action 

1.  Pleasurable  Not  useful  Play 

2.  Pleasurable  Useful  Labor 

3.  Painful  Useful  Labor 

4.  Painful  Not  useful  No  special  name 

The  fourth  combination  is  not  found  in  rational  life,  for  no 
motive  exists  to  do  a  painful  act  for  a  useless  result.  Let 
us  consider  the  other  three. 

The  first  group  comprises  most  of  the  sports,  games,  and  Play 
pastimes  found  in  every  land  and  time.    In  the  mere  putting 
forth  of  the  powers  of  mind  and  muscle  there  is  a  joy  felt 
by  children  and  men  of  all  races,  and  this  is  heightened  by 
companionship,  emulation,  and  even  by  a  spice  of  danger. 

173 


174  LABOR  AND  CLASSES  OF   LABORERS  [OH.  20 

Play  is  not  dependent  on  a  useful  objective  result  later  to 
be  enjoyed,  but,  like  beauty,  is  its  own  excuse  for  being.  The 
tired  student  goes  out-of-doors  to  bat  the  tennis-ball,  making 
no  change  in  the  material  world,  except  to  wear  out  his  shoes 
and  to  lose  the  ball,  but  finding  that  hour  rich  in  the  joy  of 
life.  If  properly  chosen,  play  strengthens  and  vivifies  both 
soul  and  body,  leaving  an  afterglow  of  health  and  happiness. 
The  choice  of  sports  and  temperance  in  their  pursuit  are 
among  the  surest  tests  of  wisdom  in  men  and  in  societies.  A 
love  of  vigorous  play  no  less  than  the  power  of  sustained 
work,  marks  the  dominant  and  progressive  peoples  of  the 
earth. 

Labor  as  Acts  in  the  second  group  give  pleasure  and  at  the  same 

pleasure  time  leave  an  objective  result.  The  hunter  gets  more  pleas- 
ure if  he  returns  with  well-filled  bags  of  game,  but  the 
distinction  between  the  sportsman  and  the  " pot-hunter" 
is  not  hard  to  find.  The  one  has  his  joy  in  the  sport,  the 
other  in  the  material  results  of  the  sport.  This  kind  of 
action  presents  some  puzzling  cases,  but  in  general  must 
be  classed  as  labor,  since  labor  is  to  be  judged  by  the  ob- 
jective economic  results  rather  than  by  the  pleasure  of 
the  act  itself. 

Labor  as  In  a  third  class  are  the  acts  that  are  painful  in  themselves, 

sacrifice        fa^  are  done  unwillingly,  but  that  leave  a  pleasurable  result. 

\  Unfortunately  a  large  part  of  the  actions  of  men  are  of 

|,this  class,  which  to  most  minds  is  the  typical  labor. 

joy  m  work        There  is  thus  labor  that  is  pleasurable  in  itself  and  labor 

is  the  ideal     that  -g  pajnfui  though  it  leads  to  a  desirable  result.     The 

social  ideal  clearly  is  that  all  human  labor  should  be  made 

pleasurable.     Social  dreamers  love  to  picture  a  day  when 

all  shall  find  for  effort  a  full  reward  in  the  mere  doing,— the 

reward  of  the  artist,  of  the  scholar,  of  the  saint,  in  addition 

to  the  objective  result  in  economic  wealth.     Probably  we 

are  ^slowly  nearing  this  ideal.     Not  only  in  the  professions 

and  in  the  esthetic  arts,  but  in  commerce,  in  mechanics,  and 

in  the  humblest  walks  of  life  are  found  men  free  from  envy, 


§1]  RELATION   OF   LABOR   TO   WEALTH  175 

•ejoicing  in  their  daily  tasks.  Such  is  the  normal  feeling 
of  the  healthy  optimist.  And  yet  in  every  serious  occupation 
there  are  numberless  moments  and  occasions  when  the  spirit 
flags  and  only  hard  necessity  holds  men  to  their  tasks.  The 
dilettante  does  not  go  far  or  long  or  steadily;  the  real  tasks 
of  the  world  are  done  by  men  that  labor,  now  with  joy,  now 
wearily. 

2.  The  agents  of  production  compose  two  great  species,  Thedistmc- 
material  goods  and  human  services.     Our  discussion  of  con-  tion  be~ 

tween  men 

sumption  goods,  rent,  and  interest  has  been  an  analysis  of  and  things 
the  nature  and  uses  of  material  goods.  We  now  come  to  the 
other  great  species,  human  services,  which  comprise  those 
acts  of  men  (one's  own  or  other's)  that  minister  to  the  grat- 
ification of  wants.  There  are  also  misdirected  efforts,  and 
evil  deeds  which  are  "disutilities"  to  all  but  the  doer. 

The  distinction  between  men  and  things  is  fundamental  in 
modern  economic  discussion  where  each  man  is  looked  upon 
as  free.  It  is  not  so  clear  where  slavery  exists  and  the  master 
looks  in  the  same  way  upon  the  services  of  his  cattle,  of  his 
chattel  slaves,  and  of  his  land.  Even  in  the  freest  society, 
man's  services  are  compared  purely  as  to  their  utility,  with 
the  uses  of  other  parts  of  the  material  world.  It  is  said  that 
the  price  of  mules  at  the  Pennsylvania  mines  has  been 
affected  by  immigration,  because  a  man  and  a  mule  some- 
times represent  interchangeable  services.  But  in  the  study 
of  political  economy  the  distinction  between  men  and  other 
material  things  must  never  be  lost  sight  of;  they  are  the 
two  fundamental  classes  of  economic  agents,  the  one  being 
solely  a  means  to  an  end,  the  other  being  an  end  in  itself. 

3.  Labor  and  material  wealth  are  complementary  and  -font and 
indispensable  to  each  other  in  most  of  their  uses.     The  dis-  ^fuLiy 
cussion  of  material  wealth  and  its  value  apart  from  the  affect  each 
subject  of  labor,  of  the  problem  of  rent  and  interest  apart  ( 
from  that  of  wages,  does  not  imply  that  this  material  wealth 
would  have  the  same  value  in  real  life  if  labor  were  absent. 

As  one  field  affects  the  value  of  another  field,  and  one  good, 


176 


LABOR  AND   CLASSES  OF  LABORERS 


I  OH.  20 


I/ 


Certain 
shares  of 
the  product 


by  substitution,  the  value  of  another  good,  so  does  labor 
affect  material  wealth.  Some  material  wealth  can  be  used 
apart  from  labor,  but  most  of  it  must  be  used  in  combina- 
tion with  some  labor.  Rent,  therefore,  is  not  determined  in 
concrete  cases  apart  from  men  and  their  services.  It  is 
allowable,  however,  in  abstract  analysis,  to  simplify  the 
question  by  leaving  out  a  difficult  complication,  and  thus 
to  set  forth  more  clearly  the  logical  bearing  and  effect  of  a 
certain  factor. 

Each  of  two  kinds  of  agents  used  together  affects  the 
utility  of  the  other,  and  the  value  of  the  product.  If  neither 
are  logically  can  be  credited  with  the  whole  value,  how  is  any  distribution 
toeachted  to  ^e  ma(^e  between  them?  JJt  is  not  possible  to  measure 
their  technical  services  in  the  product,  but  it  usually  is 
possible  to  gage  their  marginal  utility  under  particular 
conditionsT]  Flour,  water,  and  labor  are  needed  to  make 
biscuits ;  out  water  being  a  free  agent,  does  not  enter  into 
the  combination  with  any  marginal  utility.  A  match  also 
is  almost  indispensable  to  start  the  fire  (and  who  has  not 
seen  the  time  when  he  would  give  far  more  for  a  match  than 
for  a  bucket  of  coal),  but  as  things  usually  are,  the  match 
is  credited  with  a  value  of  a  very  small  fraction  of  a  cent. 
Again,  how  is  to  be  measured  the  economic  service  of  the 
tree  and  of  the  labor  needed  for  gathering  its  fruits  1  i^There 
/is  here  suggested  the  superficial  aspect  of  what  is  known  as 
*  the  problem  of  complementary  valuesTJ  Where  two  or  more 
things  are  indispensable  to  a  product,  how  much  shall  be 
credited  to  each  ? 

Labor  grati-  4.  Human  service  has  the  same  general  relation  to  wants 
ctiy  that  material  goods  have,  affording  gratification  either  di- 
rectly or  indirectly.  It  is  axiomatic  that  to  be  "  economic 
goods  "  human  efforts  like  material  goods  must  afford  utili- 
ties whose  importance  is  felt.  Many  services  give  pleasure 
directly  and  are  immediately  consumed.  A  tropical  poten- 
tate has  an  attendant  to  fan  him,  and  another  to  carry  an 
umbrella ;  a  humble  citizen  is  shaved,  doctored,  sung  to,  and 


directly 


II]  VARIETIES   OF  TALENTS  177 

played  for.  The  gratification  in  such  cases  is  directly  pro- 
duced in  personal  comfort,  in  the  consciousness  of  heightened 
beauty,  in  the  feeling  of  self-esteem.  Value  is  thus  created 
and  consumed  immediately,  taking  no  material  form  apart 
from  the  consumer. 

But  the  results  of  most  human  services  may  be  seen  to  rest,  Labor  em- 
at  least  temporarily,  in  some  material  form.  Effort  is  put  J0416^- 
upon  a  material  thing  to  be  used  later.  The  work  of  the  in  material 
waiter  in  spreading  and  arranging  the  table  is  not  an  immedi-  f 
ate  service,  for  it  is  embodied  in  material  form  an  hour  or 
two  before  the  meal.  The  service  of  cook  no  less  than  that 
of  gardener  and  butcher,  is  put  into  material  form  before  it 
comes  to  the  consumer.  The  woodman  fells,  cuts  up  and 
splits  a  tree,  and  piles  it  at  the  door,  putting  his  labor  into  a 
utility  to  be  consumed  months  afterward.  The  old  econo- 
mists used  to  class  labor  as  productive  and  unproductive 
according  as  it  was  or  was  not  embodied  in  material  form. 
The  classing  of  the  services  of  cook,  waiter,  valet,  etc.,  as 
unproductive  seems,  even  from  the  old  point  of  view,  to 
have  been  inconsistent,  and  the  attempt  to  distinguish  ser- 
vices by  any  such  test  is  now  wholly  given  up.  Whether  the 
service  rests  in  material  form  for  a  week,  a  month,  a  year, 
or  as  often  happens,  for  a  much  longer  period,  is  not  essen- 
tial. [/The  test  of  the  productiveness  of  services  is  not  their 
embodiment  in  material  form,  but  their  appearance  as  psy- 
chic income,  their  ministry  to  wants.  The  most  varied  kinds 
of  human  activity  may  be  unified  by  this  thought  in  the 
concept  of  economic  labor^y 

§  II.      VARIETIES    OP    TALENTS    AND    OP    ABILITIES    IN    MEN 

1.     As  material  things  differ  in  their  fitness  to  gratify  Grades  of 

wants,  so  do  men  differ  in  their  powers  of  labor.    The  fields,  jjjjjj^ 

hammers,  plows,  tools,   and  machinery  of  different  kinds  to  grades  of 

and  qualities  have  been  seen  to  grade  off  from  the  best  to  wealth 
the  poorest.     The  poorest,  discarded  or  just  about  to  be 
12 


178  LABOR  AND  CLASSES  OF  LABORERS  [CH.  20 

discarded,  are  no-rent  agents.  The  utility  felt  and  recog- 
nized in  the  better  qualities  is  expressed  in  the  rents  they 
yield.  Recognizing  the  variety  and  inequality  of  human 
talent,  some  economists  of  late  speak  of  the  "rent"  of  ability, 
meaning  that,  like  land  rent,  the  greater  utility  (and  cor- 
responding reward)  of  some  labor  as  compared  with  others, 
reflects  the  difference  in  the  quality  of  agents.  But  this 
expression,  though  often  met  in  contemporary  economic 
writings,  is  one  to  be  avoided  because  it  tends  to  blur  the 
essential  distinction  between  human  and  other  agents.  Pur- 
suing the  same  analogy  some  economists  have  talked  of  cap- 
italizing the  worker, — expressing  in  a  lump  sum  the  value  of 
the  man  as  the  present  worth  of  the  series  of  incomes  which 
he  may  be  expected  to  earn  in  his  working  life.  This,  also, 
is  to  be  avoided,  for  while  possibly  it  is  suggestive  in  study- 
ing some  problems,  it  is  on  the  whole  a  misleading  analogy, 
dimming  the  distinction  between  free-workers  and  owned 
and  exchangeable  wealth. 

Physical  2.     The  physical  strength  of  workers  differs  according  to 

amongmen  a9e>  individual,  race,  and  sex.  Differences  due  to  age  are 
the  most  obvious.  The  child,  at  first  weak,  grows  toward 
his  maximum  of  physical  strength,  which  he  attains  before 
his  fullest  intellectual  capacity.  The  period  of  maximum 
physical  working  power  lasts  fifteen  to  twenty-five  years 
according  to  the  individual,  and  then  gradually  declines  as 
the  old  worker  approaches  again  the  inefficiency  of  the  child. 
Mental  efficiency  develops  more  slowly  and  longer,  the  high- 
est qualities  of  judgment  and  wisdom  being  the  fruits  only 
of  a  life  rich  in  experiences.  Families  and  strains  of  stock 
differ  notably  in  physical  and  mental  powers;  one  excels  in 
stature,  another  in  development  of  muscle.  The  differences 
within  families  are  inexplicable,  sometimes  one  brother  ex- 
celling in  one  thing,  the  other  in  another.  The  physically 
perfect  man  is  a  rare  product.  Among  three  thousand  stu- 
dents are  but  two  score  endowed  with  the  remarkable 
combination  of  lungs,  heart,  muscle,  nerve,  and  character, 
that  makes  possible  the  finest  athletes.  The  national  and 


§11]  VARIETIES  OF   TALENTS  179 

racial  differences  in  working  power,  even  in  the  simplest 
tasks,  are  marked  but  difficult  to  explain,  as  so  many  in- 
fluences of  customs,  habits  of  life,  and  varieties  of  diet 
modify  the  result.  We  cannot  tell  how  much  of  the  English- 
man's great  superiority  over  the  East  Indiaman  is  due  to 
individual,  native  differences  of  mind  and  body,  how  much 
to  the  social  environment  in  which  they  have  lived.  Cer- 
tainly, though,  the  difference  is  not  mainly  one  in  size ;  in  the 
Chinese  War  the  little  brown  men  of  Japan  outmarched  all 
the  others.  Certainly  fiber  counts  for  more  than  bulk,  and 
character  for  more  than  muscle. 

A  difference  in  the  physical  strength  of  the  sexes  is  found  Compara- 

Ai 

in  some  degree  throughout  the  world,  but  it  would  appear  8trengthof 
to  be  far  more  marked  in  civilized  than  in  savage  communi-  men  and 
ties.  Compare  the  records  at  the  Vassar  field-games  with  W0tt 
that  of  the  men  in  any  leading  college :  in  the  hundred-yard 
dash,  fifteen  seconds  as  against  ten  and  a  fraction;  in  the 
high  jump,  forty-eight  inches  as  against  six  feet  and  over. 
The  muscular  force  of  American  college  women  as  tested  in 
the  Yale  and  the  Oberlin  gymnasiums  is  but  one  third  that 
of  men,  that  is,  taking  all  the  students,  the  weaklings  and  the 
little  men  along  with  the  athletes,  and  the  women  large  and 
small.  As  to  strength  of  back  the  average  for  men  is 
154  kilograms,  for  women  54  kilograms;  legs,  average  for 
men  186,  average  for  women  76.5;  right  forearm,  average 
for  men  56,  average  for  women  21.4.  This  is  an  abnormal 
difference.  The  natural  and  possible  strength  is  more  nearly 
attained  by  men  than  by  women  under  our  social  conditions.  fV 
(  Women  escape  the  physical  toil  which  strengthens,  but  not 
\he  mental  strain  which  kills)  Men  carry  more  of  the  wood,| 
but  the  women  not  less  of  the  worries.  A  fairer  test  is 
applied  among  peasants  in  field-work  in  France  and  Ger-l 
many,  where  the  strength  of  women  is  found  to  be  about 
two  thirds  that  of  men.  American  women  should  do  and  will 
do  more  to  attain  their  natural  strength  when  we  attain 
sounder  ideas  of  education  and  saner  modes  of  living. 
3.  Differences  in  intelligence  are  a  resultant  of  native 


180  LABOR   AND  CLASSES  OF  LABORER  [C.H20 

Talent  and  \talent  and  acquired  ability.  It  is  difficult  to  distinguish 
iactora  of"  these  two  factors  sharply.  Two  men  sitting  side  by  side  in 
efficiency  an  examination,  get  the  same  grade ;  one  of  them  has  had  ex- 
cellent preparation  from  childhood,  and  all  the  opportunities 
that  money,  travel,  and  cultured  associates  can  give;  the 
other,  under  great  difficulties,  has  prepared  in  a  country  dis- 
trict school  with  a  little  coaching  now  and  then,  and  strug- 
gling against  great  odds,  has  at  last  entered  college.  The  same 
grade  does  not  mean  that  their  natural  ability  or  even  their 
efficiency  in  this  particular  class,  is  equal.  Yet  the  grade 
is  the  best  expression  to  be  had  of  their  efficiency  in  the 
particular  work.  Native  intelligence  shortens  the  time 
needed  for  preparation  in  any  calling ;  hastens  new  methods ; 
decreases  the  cost  of  supervision;  saves  materials,  tools,  and 
time ;  diminishes  loss  from  breakage ;  makes  possible  the  use 
of  finer  machinery  and  better  appliances,  and  imparts  those 
subtler  qualities  that  distinguish  the  best  from  the  mediocre 
products.  Education  and  native  talent  are  in  a  degree 
interchangeable;  one  supplements  the  other.  Education  in- 
creases adaptability;  the  trained  mind  will  outstrip  the  un- 
trained mind  of  greater  power.  It  makes  direction  easier, 
fits  for  higher  tasks,  and  decreases  the  difficulty  of 
cooperation.  Any  ability  may  be  helped  by  education  in  the 
broad  and  true  sense,  though  a  fool  cannot  be  made  wise 
by  training,  and  though  many  a  potential  genius  doubtless 
has  been  dwarfed  in  dusty  school-rooms  by  stupid  teachers. 
The  moral  4.  The  moral  qualities  of  the  worker  are  increasingly 
Qu?redinre~  ^mP°r^an^  as  society  grows  more  complex.  The  need  of  a 
industry  particular  moral  quality  is  relative  to  the  special  task  in 
hand.  Honesty  is  needed  in  the  bank  teller,  but  he  need 
not  spoil  a  good  story.  The  champion  broncho-buster  of 
Arizona  is  not  a  Sunday-school  superintendent.  So,  disci- 
pline, obedience,  self-control,  regularity,  and  punctuality  are 
needed,  for  more  and  more  in  these  days  business  is  run 
by  the  watch;  confidence,  patience,  good  temper,  in  fact  all 
the  virtues  in  the  calendar  are  necessary  at  some  time  and 


$11]  VARIETIES  OF   TALENTS  181 

place,  and  most  of  them  are  needed  all  the  time  in  business. 
Places  may  be  found  in  our  developed  society  for  those  who 
are  deficient  in  these  qualities  (it  is  fortunate  that  it  is  so), 
but  these  are  the  poorer  places.    Many  men  fail  to  examine\ 
the  qualities  necessary  for  success,  and  do  not  understand  |^ 
the  causes  of  their  own  failure.    Blind  to  their  own  faults,/^ 
they  are  dropped  down  one  notch  after  another  in  the  scale/ 
of  industry,  and,  equally  blind  to  the  virtues  of  their  suc- 
cessful rivals,  they  rail  against  the  unjust  fates. 

5.  Skill  and  capacity  in  industrial  tasks  is  a  resultant  of 
many  qualities.     The  simplest  task  calls  for  a  combination 
of  force  and  judgment,— even  the  digging  of  a  ditch,  the 
raising  of  a  window,  or  the  fitting  of  a  stovepipe.    For  most 
industrial  tasks  rarer  combinations  of  qualities  are  required. 
The  retail  clerk  must  be  neat,  punctual,  polite,  and  long 
suffering.     A  confidential  clerk  must  have  discretion,  judg- 
ment, and  other  moral  qualities  in  an  unusual  combination. 
The  substitution  of  qualities  is  possible  within  limits ;  a  rare 
quality  may  make  amends  for  the  lack  of  a  commoner  one, 
and  a  man  may,  because  of  peculiar  fitness  in  some  regards, 
continue  to  hold  a  position  for  which  in  other  ways  he  is 
iittle  fitted.    The  rarest  and  most  valued  worker  is  one  unit- 
ing many  good  qualities  and  fitted  to  deal  with  emergencies. 
The  economic  efficiency  of  the  worker  often  is  no  stronger 
than   its  weakest  link.     A   strong  motive   for  training   is 
offered  by  the  fact  that  supplying  some  one  lacking  quality 
may  raise  the  total  efficiency  in  a  remarkable  degree. 

6.  Biologic  studies  have  of  late  made  clearer  the  existence  inequality 
and  continuation  of  the  inequality  of  talents.    The  political  gj,^^ 
philosophy  of  the  eighteenth  century  was  based  on  the  idea  biologic 
of  natural  rights  and  natural  equality.     Adam  Smith,  ac- 
cepting the  prevailing  view,  discussed  wages  on  the  assump- 
tion that  all  men  had  equal  natural  ability.     It  is  still  a  I 
favorite  assumption  of  radical  social  reformers  that  the  nat- 
ural ability  of  all  men  is  equal,  and  that  all  the  differences 

in   success  result  from  political   injustice.     The   study   of 


182 


LABOR  AND  CLASSES  OF  LABORERS 


[CH.  20 


biology  of  late  has  made  patent  the  unending  differences 
that  prevail  throughout  the  animate  world.  No  two  members 
of  the  same  family  or  species  are  just  alike;  no  two  pigeons 
have  wings  of  just  the  same  length.  Nature  by  numberless 
devices  is  experimenting  constantly  with  variations  on  either 
side  of  the  established  mean.  The  accepted  fact  of  biologic 
evolution  rests  on  the  foundation  of  inequality  in  structure 
and  powers,  making  possible  selection  and  adaptation.  Men 
in  all  their  qualities  of  mind  and  body  display  this  kaleide- 
scopic  variety.  In  all  life  there  is  inequality,  and  the  whole 
drama  of  human  history  as  well  as  that  of  biologic  evolu- 
tion must  be  meaningless  or  illusory  to  the  man  who  does 
not  see  this  truth.  Accustomed  now  to  this  point  of  view, 
we  as  inevitably  think  of  the  natural  inequalities  in  men  as 
did  Adam  Smith  of  their  equality. 

This  fact  does  not  force  to  the  conclusion  that  industrial 
inequality  as  it  exists  to-day,  the  great  disparity  of  in- 
comes, correctly  or  justly  reflects  the  degree  of  difference 
in  men's  qualities,  either  native  or  acquired.  It  does  not 
follow  that  a  thousand-dollar  income  represents  ten  times 
the  ability  of  a  hundred  dollar  one— far  from  it.  But  to 
those  who  ignore  the  inequality  of  men,  the  whole  problem  of 
industrial  remuneration  must  remain  a  mystery.  A  crude 
socialism  is  possible  only  to  those  who  are  blind  to  the 
enormous  differences  in  human  capacity. 

7.  The  scarcity  of  human  services,  relative  to  wants,  is 
the  fundamental  fact  in  the  problem  of  wages.  It  is  clearly 
seen  that  some  qualities  of  service  are  scarce.  Most  women 
will  confess  that  they  cannot  warble  as  Patti  could,  most 
men  will  admit  that  they  have  not  the  mercantile  ability  of 
John  Wanamaker.  The  man  of  mediocre  capacity  recog- 
nizes even  through  the  fog  of  his  self-esteem  that  there  is 
a  reason  for  the  high  value  of  certain  rare  services.  \J3ut  it 
must  also  be  recognized  that\fhe  commonest  services  have 
value  only  because  they  are  scarce.  There  are  many  things 
jto  be  done  if  there  were  labor  enough  to  do  them.  There  is 


*II]  VARIETIES  OF   TALENTS  183 

no  need  to  "make  work,"  in  the  popular  sense;  it  is  here,!  unlimited 
but  labor  is  lacking  to  do  it.  It  is  true  there  may  be  a ;  demand  for 
temporary  superfluity  of  human  labor  at  a  time  of  an  indus- 
•  trial  crisis.  There  is  at  all  times  a  superfluity  of  "  useless 
human  agents  whose  qualities  are  such  that  they  have  no 
net  utility.  The  ignorant,  insane,  feeble-minded,  vicious, 
drunken,  and  debauched,  can  give  to  the  world  only  negative 
utilities.  But  services  that  are  in  any  degree  useful  are 
nearly  always  in  demand,  and  the  higher  services  are  so  rare 
that  they  are  in  great  demand.  The  proverb,  "  There's  al- 
ways room  at  the  top,"  is  seen  to  be  true  when  conditions 
are  thus  analyzed.  There  is  a  large,  though  limited,  supply 
of  the  commoner  kinds  of  services  at  the  bottom  of  the  scale, 
but  in  every  branch  of  human  effort  there  is  a  never-ending 
lack  of  that  higher  qualification  and  training  required  for 
the  best  results. 


CHAPTER  21 
THE   SUPPLY  OF  LABOR 

§  I.       WHAT   IS   A  DOCTRINE   OF   POPULATION  ? 

1.  The  supply  of  labor  means  here  not  the  number  of 
workers  available  in  any  one  industry,  but  the  number  avail- 
able in  the  whole  field  of  industry.  The  individual  employer 
thinks  of  the  supply  of  labor  as  consisting  of  the  men  seeking 
employment  in  his  special  industry.  In  this  view  it  is  the 
demand  by  the  employers  that  apportions  the  workers  among 
the  various  occupations.  The  social  view  of  the  supply  of 
labor,  however,  looks  at  the  whole  field.  The  demand  for 
labor  is  then  seen  to  be  represented  not  by  human  employers, 
but  by  resources  and  agents  presenting  opportunities  and 
demanding  labor  to  employ  them.  The  rich  acre,  the  tool, 
the  machine,  all  material  wealth  needing  the  human  touch  to 
give  it  a  higher  utility,  represent  a  demand  for  labor  in  this 
broad  sense.  The  thought  of  a  supply  of  labor  is  therefore 
relative  to  that  of  the  demand  embodied  in  resources.  A 
million  men  are  a  great  or  a  small  supply  of  labor  according 
as  they  occupy  a  little  island  or  a  large  continent,  according 
as  they  are  equipped  with  a  small  or  a  large  supply  of  agents. 
^  2.  "Supply  of  labor,"  as  an  economic  problem,  presents 
a  large  and  complex  case  of  diminishing  returns^JThe  popu- 
lation of  different  countries  and  of  different  sections  of  a* 
country  is  seen  to  bear  a  general  relation  to  their  resourcesT] 
An  unintelligent  race  with  little  wealth  and  poor  machinery 
is  doomed  to  remain  few  in  numbers.  Mountains,  districts 
poorly  watered,  the  frozen  regions  of  the  North,  are  sparsely 

184 


§1]  WHAT   IS  A   DOCTRINE  OF  POPULATION?  185 

populated  because  natural  resources  are  lacking.     If  foodj 
production  alone  is  thought  of  there  are  apparent  exceptions! 
to  this  statement,  but  there  are  no  absolute  contradictions  of 
it.    A  favored  harbor  may  make  possible  a  flourishing  com- 
merce on  a  rocky  coast ;  an  unfertile  soil  may  support  a  large 
population  when  great  deposits  of  coal  or  iron  insure  by        ^^ 
exchange  great  food-supplies.     Productivity  must  be  meas-       f 
ured  under  modern  conditions  by  the  purchasing  power  >that  V 
is  possible  in  the  environment.  [Jhe  connection  (5f  wealth  and 
resources  with  the  extent  of  the  population  is  in  itself  a  recog- 
nition of  diminishing  returns^}  of  an  objective  limit  to  the 
number  of  men  that  can  occupy  a  certain  area  and  employ  a 
given  stock  of  agents.^} 

3.  Each  species  of  the  lower  animals  is  seen  to  have  a  Equilibrium 
relatively  fixed  habitat  limited  by  its  food-supply  and  by  its  ^tween 
enemies.  The  rocks  tell  a  story  of  a  slow  and  steady  change  animals  of 
that  has  gone  on  in  the  earth  and  in  the  species  of  animals  different 
that  inhabit  it.  History  records  some  rapid  changes  due  to 
convulsions  of  nature  or  to  interference  by  man  with  the  nat- 
ural conditions.  But  the  usual  condition  is  an  equilibrium 
of  numbers,  long  maintained,  though  each  species  appears 
to  have  in  itself  a  capacity  for  unlimited  increase.  Why  this 
contradiction?  The  limit  set  by  the  food-supply  is  seen  in 
a  simple  case  when  herbivorous  animals  are  placed  on  an 
island  from  which  they  cannot  escape,  and  where  there  are 
no  dogs,  wolves,  weasels,  or  foxes.  Substantially  this  ex- 
periment was  unintentionally  tried  on  an  enormous  scale 
with  the  rabbit  in  Australia.  This  peculiar  and  long-isolated 
continent  contained  none  of  the  rabbit's  ancient  enemies. 
The  rabbits  became  a  pest,  devastated  great  areas,  were 
hunted,  trapped,  poisoned,  and  great  numbers  of  them  died 
of  starvation  outside  the  fences  erected  to  stop  their  advance. 
In  the  imaginary  island  they  would  increase  up  to  the  point 
where  starvation  would  bring  about  an  equilibrium  between 
the  number  of  animals  and  the  food  supply.  The  destruction 
of  one  kind  of  animal  by  another  limits  numbers  in  another 


186  THE   SUPPLY  OF  LABOR  [CH.  21 

way.  The  number  of  lions  is  limited  by  the  number  of  their 
prey  in  the  region  where  they  roam.  The  number  of  deer, 
therefore,  is  limited  in  two  ways,  by  the  amount  of  their  food 
and  by  the  number  of  lions  which  catch  the  deer.  The  more 
numerous  the  lions,  the  fewer  the  deer;  the  fewer  the  deer, 
the  greater  the  supply  of  vegetable  food ;  as  the  pressure  in- 
creases on  one  side,  it  decreases  on  the  other,  until  an  equi- 
librium is  reached. 

Throughout  nature  each  species  of  animal  keeps  its  custom- 
ary place,  changing  little  despite  its  efforts  to  increase  and 
to  crowd  into  the  habitat  of  other  species.  Even  the  slow- 
breeding  elephant,  with  a  period  of  gestation  of  three  years, 
and  producing  one  calf  at  a  birth,  would  cover  the  entire 
earth  and  leave  no  standing-room  in  a  few  centuries  if  every 
calf  born  could  live  to  full  age.  The  myriads  of  frogs  born 
every  spring,  the  swarms  of  insects,  the  countless  plants,  are 
struggling  to  find  a  foothold  on  the  crowded  earth.  Of  the 
vastly  greater  number  of  seeds  and  embryos,  only  one  in  a 
multitude  ever  comes  or  could  come  to  maturity.  Here  are 
the  undisputed  facts  on  which  rests  a  biologic  "doctrine  of 
population, ?  *  so  to  speak,  for  the  vegetable  and  lower  animal 
world.  Because  of  the  limited  powers  of  the  soil,  no  form  of 
life,  animal  or  vegetable,  can  continue  to  increase  even  for  a 
single  generation,  without  meeting  enormous  forces  of  oppo- 
sition, which  destroy  great  numbers  and  set  a  limit  to  the 
increase  of  the  species. 

\  4.  A  doctrine  of  human  population  is  a  reasoned  explana- 
tion of  the  causes  determining  the  number  of  people  in  the 
world.  Man  in  his  economic  life  is  constantly  struggling 
with  the  problem  of  the  scarcity  of  goods.  If  in  any  given  en- 
vironment men  continue  long  to  increase,  they  must,  like  the 
lower  animals,  meet  limits  in  the  capacities  of  the  resources 
they  use.  )  The  supply  of  labor  force  which  is  thus  brought 
to  be  combined  with  the  material  agents  must  meet  with  di- 
minishing returns  unless  these  agents  also  continue  to  in- 
crease at  a  like  rate^TJThe  relation  of  population  to  resources 


§11] 


POPULATION  IN   HUMAN   SOCIETY 


187 


thus  presents  probably  the  most  fundamental  problem  in  the 
realm  of  economics/?  It  is  a  problem  of  great  complexity,  bris- 
tling with  difficulties,  and  incapable  of  exact  mathematical 
treatment  ;  but  it  is  capable  of  rational  study.  There  is  a 
great  difference  between  a  purely  fatalistic,,  view  of  this 
question  and  the  view  thatjsjojhp  rpflp.hpH  by  a  consideration 
of  the  motive^,  causes,  and  physicaLinflnpnpps  at.  woA-  It  is 
possible  to  find  some  principles  in  the  chaos  of  prejudices  and 
contradictions  that  the  subject  presents.  The  fruit  of  a  cen- 
tury of  discussion  of  the  economic,  social,  and  biologic  factors 
involved,  is  a  rational,  if  not  a  final,  doctrine  of  population. 


§  II.      POPULATION  IN  HUMAN  SOCIETY 

1.     In  the  earlier  stages  of  human  history,  population  is  The  biologic 
limited  mainly  by  biologic  factors.     The  biologic  stage  con-  *^£°f 
tinues  so  long  as  there  are  no  artificial  restraints  put  on  the  population 
birth-rate,  and  no  deliberate  destruction  of  offspring  for  the 
purposes  of  limiting  the  size  of  the  family.    There  the  limits 
are  all  objective;  they  are  found  in  scantiness  of  the  food- 
supply,   or  in   destruction  by  enemies,   animal  or  human. 
Each  species  has  an  average  or  normal  birth-rate,  great  or 
small.    Just  why  this  varies,  why  the  rabbit  produces  a  score 
of  young  in  a  year,  and  the  elephant  but  one  in  three  years, 
is  a  question  capable  of  a  rational  answer,  but  it  is  one  for 
the  natural  scientist  rather  than  for  the  economist.     Each 
species  is  impelled  by  instinct  to  realize  this  birth-rate,  to 
bring  into  existence  as  many  young  as  possible. 

No  human  society  known  to  us  is  so  primitive  that  it  has 
not  passed  this  stage,  but  many  societies  have  risen  but  little 
above  it.  In  most  savage  tribes,  where  starvation,  disease, 
and  war  are  constantly  at  work,  the  difficult  task  is  to  main- 
tain the  population.  Few  of  those  born  arrive  at  maturity. 
The  custom  of  the  adoption  of  captives  from  hostile  tribes  is 
wide-spread,  because  the  efficiency  and  even  the  survival  of 
the  tribe  depends  upon  keeping  up  its  number  of  warriors. 


188 


THE  SUPPLY  OF  LABOR 


[CH.  21 


War  among 

primitive 

societies 


2.  War  for  the  possession  of  limited  resources  is  the  first 
rude  social  remedy  for  an  excess  of  population.    War  is  the 
normal  condition  of  most  primitive  tribes.    Its  cause  usually 
appears  to  be  standing  feuds  and  ancient  enmities,  but  the 
deeper  and  abiding  cause  is  the  struggle  for  hunting-grounds, 
for  pasturage,  for  natural  resources.    The  rude  industry  and 
economy  of  hunting,  fishing,  or  pastoral  peoples,  or  of  those 
in  the  earlier  stages  of  agriculture,  requires  a  large  area  for 
a  small  population.    Distant  excursions  and  frequent  forays, 
when  food  fails,  develop  rival  claims  to  favored  districts,  and 
war  is  the  only  settlement.   Fighting  under  these  conditions 
is  an  activity  of  such  economic  importance  that  much  of  the 
energy  of  the  tribe  must  be  strenuously  given  to  it.     The 
ceaseless  loss  of  life  in  savage  wars  is  almost  incredible  to 
modern  minds.    The  invasion  of  the  Roman  Empire  by  the 
Teutonic  tribes,  the  later  successive  inundations  of  medieval 
Europe  by  the  fierce  pastoral  tribes  from  central  Asia,  are 
more  recent  and  familiar  examples  of  the  economic  and  po- 
litical effects  of  the  increase  of  population  and  of  the  out- 
growing of  resources  by  barbarian  peoples.    When  the  custom 
arises  of  capturing  enemies  and  reducing  them  to  slavery 
instead  of  killing  them,  forces  are  set  into  operation  to  reor- 
ganize society  and  to  create  new  checks  on  the  growth  of 
population. 

3.  Volitional  control  of  population  begins  by  the  destruc- 
tion of  offspring  before  or  after  birth.    The  population  prob- 
lem ceases  to  be  simply  biologic,  and  takes  on  its  sociological 
aspect,  when  the  awakening  intelligence  of  man  first  grasps 
the  mystery  of  birth,  and  when  the  first  attempts  are  made 
in  any  way  to  regulate  family  relations  or  to  interfere  with 
the  growth  of  numbers.     The  student  of  primitive  peoples 
finds  in  the  methods  applied  to  prevent  the  birth  of  children 
an  almost  inconceivable  brutality.     The  same  methods  to  a 
large  degree  persist  in  savage  communities  to-day.    Infanti- 
cide was  generally  practiced  in  ancient  times  among  peoples 
of  advanced  civilization,  as,  for  example,  in  Sparta  and  Rome, 


§H]  POPULATION   IN  HUMAN   SOCIETY  189 

where  not  only  deformed  and  weak  children,  but  unwelcome 
ones,  commonly  were  destroyed.  The  practice,  if  not  legal- 
ized, is  at  least  permitted  even  to-day  by  public  opinion  in 
great  portions  of  India,  China,  and  other  densely  populated 
districts  of  the  world.  It  is  one  of  the  dark  spots  on  our  own 
civilization. 

4.  The  pressure  of  increase  of  numbers  on  resources  is  Private 
confined  by  individual  industry  and  by  private  property  to  poverty 
special  portions  of  the  popwation.    A  condition  of  commu-  population 
nism,  where  all  the  members  of  the  tribe  or  family  share 
equally,  means  that  all  enjoy  together  when  food  and  wealth 

are  abundant,  and  all  starve  together  when  it  becomes  scarce. 
Along  with  a  fierce  enmity  for  other  tribes,  is  found  in  many 
early  societies  a  close  approximation  to  tribal  communism. 
Private  property  alters  the  nature  of  the  struggle  for  sub- 
sistence and  of  the  motives  for  limiting  population.  Society 
divides  into  a  number  of  partially  independent  classes  or 
family  groups,  each  holding  its  share  of  wealth  apart,  not 
in  common  with  the  tribe.  A  society  with  private  property 
is  like  a  ship  divided  into  a  number  of  water-tight  compart- 
ments. In  communistic  conditions  if  population  increases,  all 
sink  together  into  want.  The  self-interest  of  those  having 
private  property  keeps  them  from  dividing  their  property, 
and  starvation  is  confined  to  the  propertyless  members. 
This  acts  in  two  ways:  it  increases  the  motive  for  the  pro- 
duction of  wealth ;  it  gives  a  motive  for  the  limitation  of  the 
consumers  of  the  wealth.  A  smaller  family  with  larger  re- 
sources means  a  wider  margin  between  numbers  and  mis-  The  problem 
ery.  This  converts  the  problem  of  population  from  a  ma-  *ngSycblc 
terial  one  of  a  balance  of  food  and  physical  needs,  to 
a  psychic  one  of  a  balance  of  motives  in  the  minds  of  men. 
When  this  stage  is  reached,  the  extreme  objective  limit 
of  the  birth-rate  or  of  increase  of  population  is  no  longer  at- 
tained in  the  well-to-do  classes,  although  it  may  still  con- 
tinue to  be  in  the  less  provident. 

5.  Volitional  control  is  effective  in  very  different  degrees 


190 


THE   SUPPLY   OF  LABOR 


[CH.  21 


Social 
classes 
differ  in 
volitional 
control 


Motives  in 

volitional 

control 


in  different  families  and  industrial  classes.  The  possession  of 
property  is  both  a  sign  of  forethought  and  an  incentive  to  it. 
Concern  for  the  welfare  of  children  is  one  of  the  most  pow- 
erful motives,  especially  after  social  distinctions  become 
marked.  It  may  become  abnormally  strong,  leading  parents 
to  sacrifice  their  own  welfare  or  their  oVn  lives  foolishly  for 
their  children,  as  is  done  often  in  the  accumulation  of  prop- 
erty. Among  the  classes  with  property  the  provision  for  the 
children  depends  not  only  upon  the  amount  of  wealth,  but 
upon  the  number  among  whom  it  is  to  be  divided.  It  is  simple 
division :  wealth  the  dividend,  number  of  children  the  divisor. 

Among  the  poorer  classes  very  different  motives  operate. 
After  the  first  few  years  the  parents'  income  is  increased  by 
the  earnings  of  the  children,  both  on  the  farm  and  in  the 
factory  districts  if  the  laws  do  not  prohibit  child  labor. 
Moreover,  when  the  children  are  grown,  their  wages  will  de- 
pend on  the  general  labor  market,  not  upon  "the  number  of 
their  brothers  and  sisters.  So,  according  as  the  family  in- 
come is  from  rents  or  from  wages,  the  motives  of  the  parents 
differ. 

Postponement  of  marriage  must  be  classed  as  a  mode  of 
volitional  control  of  population.  The  average  age  of  mar- 
riage, both  of  men  and  women,  is  higher  in  the  classes  of 
greater  wealth  and  ambition  than  in  the  poorer  classes.  The 
contrast  in  this  regard  between  civilized  and  savage  peoples 
is  likewise  noteworthy.  The  failure  to  marry,  from  whatever 
cause,  is,  in  the  social  view  of  the  question,  volitional  control. 
It  is  rare  that  the  motive  is  directly  and  immediately  the  wish 
to  avoid  parenthood ;  now  it  is  religious  zeal,  again  it  is  dis- 
appointed sentiment ;  here  it  is  conflicting  duty,  and  there  it 
is  the  individual  selfish  wish  to  retain  an  undivided  income 
for  one's  own  enjoyment.  By  countless  strands  of  motive 
in  the  form  of  sentiments,  social  institutions,  and  interests, 
the  primitive  impulses  of  humanity  are  firmly  bound;  and 
in  varying  degrees,  in  different  classes,  the  enormous  possi- 
bilities of  reproduction  are  controlled  by  human  volition. 


CURRENT  ASPECT  OP  THE  POPULATION  PROBLEM    191 


§  III.      CURRENT   ASPECT   OF    THE   POPULATION   PROBLEM 

1.  Changes  in  population  are  resultants  of  many  forces:  The  many 
those  favoring  a  high   birth-rate  and  low  death-rate,  and  motives 

controlling 

those  limiting  births  or  survival.  Whether  the  population  on  population 
the  whole  shall  grow,  stand  still,  or  diminish,  depends  upon 
the  relative  strength  of  contending  forces  making  for  life  or 
death.  But  this  control  may  lose  its  cruder  aspect  and  may 
be  waged  in  the  realm  of  motive.  More  and  more  it  is  voli- 
tion that  controls  in  human  society  the  growth  of  population ; 
less  and  less  it  is  the  objective  limit  of  the  food-supply.  Dire 
need  resulting  in  ill-health  and  even  in  starvation,  is  still 
acting  in  some  portions  of  society,  but  less  to-day  than  ever 
before.  The  growth  of  population  in  this  stage  is  not  "fa- 
talistic," as  there  is  no  inevitable  tendency  to  increase  or  to 
decrease.  It  depends  on  the  interaction  of  a  number  of  forces, 
clearly  distinguishable,  by  which  population  actually  is  kept 
far  within  the  limits  of  food  resources^  Volitional  control 
is  not  by  a  central  and  unified  despotism  determining  human 
action,  but  it  is  by  motives  of  the  most  complex  sort,  diffused 
throughout  society  and  acting  upon  every  member  of  it. 

2.  The  desire  to  maintain  and  raise  the  standard  of  life  is 
the  most  effective  motive  limiting  population  in  our  society. 
The  phrase  "standard  of  life"  expresses  the  complex  thought  com 
of  that  measure  of  necessities,  comforts,  and  luxuries  con- 
sidered by  any  individual  to  be  indispensable  for  himself  and 
his  children ;  that  measure  which  he  will  make  great  sacrifices 

to  secure.  This  standard  differs  from  land  to  land,  and  from 
time  to  time.  In  the  Asiatic  countries  it  is  so  low  that 
it  touches  in  large  classes  the  minimum  of  subsistence.  De- 
spite adverse  influences  and  the  uninterrupted  series  of 
famines,  the  population  of  India  in  the  last  century  under 
English  rule  increased  from  two  hundred  millions  to  three 
hundred  millions.  Such  a  population  "lets  out  all  the 
slack"  of  income,  and  never  takes  up  any.  The  great  public 


192 


THE   SUPPLY   OF   LABOR 


[CH.  21 


works  of  irrigation,  forestry,  and  transportation,  and  the 
development  of  industry  under  English  rule,  gave  an  oppor- 
tunity for  a  higher  standard  of  living;  but  it  was  used  in- 
stead to  permit  the  existence  of  a  greater  number  of  men  in 
the  same  old  misery.  These  facts  have  a  bearing  upon  the 
question  of  Oriental  immigration  to  America.  The  emigra- 
tion of  millions  of  Chinese  from  their  native  land  would  leave 
no  void  in  their  numbers.  Peopling  their  own  land  con- 
stantly down  to  their  own  standard  of  living,  they  have  the 
power,  if  they  are  tempted  hither  in  great  numbers,  to  people 
this  continent  also  to  the  same  density. 

The  American  standard  of  living,  while  it  differs  in  differ- 
ent classes,  is  on  the  whole  the  highest  found  anywhere  in 
the  world.  The  increasing  appeal  to  individual  selfishness  in 
the  last  twenty-five  years,  the  greater  ease  of  travel  and 
taste  for  it,  the  multiplied  and  costly  pleasures  and  pas- 
times, make  children  a  greater  and  greater  burden.  The  ab- 
normal conditions  of  city  life  increase  the  sacrifice  required 
to  support  children,  and  take  away  a  large  part  of  the  value 
of  their  services  in  the  home.  In  the  greater  cities  are  whole 
areas  larger  than  the  city  of  Ithaca  where  children  are  not 
admitted  to  the  apartment  houses,  where  no  one  who  has  a 
child  can  rent  rooms.  Despite  the  increasing  incomes  of 
the  masses  of  the  population,  the  number  of  childless  homes 
is  increasing,  and  while  the  standard  of  comfort  grows,  the 
size  of  the  average  family  dwindles. 

3.  Great  improvements  in  medical  and  in  sanitary  science 
are  decreasing  the  death-rate  and  thus  partly  neutralizing  the 
effects  of  a  lower  birth-rate.  The  death-rate  in  a  community 
is  a  fairly  good  index  of  its  general  welfare.  The  death  of 
a  large  proportion  of  the  children  before  they  arrive  at  ma- 
turity indicates  poverty  or  ignorance.  The  death-rate  in  the 
Middle  Ages,  especially  in  cities,  was  tremendously  high,  but 
during  the  last  hundred  years  has  steadily  decreased.  The 
race  of  man  which,  ever  since  the  beginnings  of  volitional 
control,  probably  has  had  a  smaller  death-rate  relative  to  the 


§  III]    CURRENT  ASPECT  OF  THE  POPULATION  PROBLEM     193 

total  number  of  individuals  coming  into  existence  than  has 
any  other  species  of  living  creatures,  has  to-day  a  far  lower 
rate  than  ever  before.  Even  in  the  most  miserable  industrial 
population  where  one  half  the  children  die  before  they  are 
five  years  old,  the  death-rate  is  much  less  than  among  the 
young  of  the  lion  or  the  eagle. 

4.  Volitional  control  is  acting  with  the  greatest  force  in  The  quality 
the  more  capable  classes  and  thus  threatens  to  reduce  the 
quality  of  the  population.  The  quality  of  population  is  of 
more  import  than  its  quantity,  alike  in  its  economic,  its  social, 
and  its  ethical  results.  The  productive  force  of  a  population  is 
not  measured  merely  by  numbers.  ' '  Who"  make  up  the  popu- 
lation at  any  moment  is  no  more  a  matter  of  indifference  than 
' '  how  many. ' '  One  new-born  child  represents  a  negative  addi- 
tion to  society,  unintelligent,  incapable,  foredoomed  to  become 
a  burden ;  another,  with  energy,  thrift,  inventive  genius,  comes 
to  enrich  and  uplift  his  fellow-men.  Quality  counts  for  much. 

The  average  number  of  children  reaching  maturity  in  the 
families  of  the  American  colonists  was  six ;  the  average  num- 
ber to-day  in  families  of  American  descent  is  about  two. 
Since  many  of  these  do  not  live  to  maturity,  and  of  those  who 
do  survive  many  do  not  marry,  the  stock  does  not  maintain  change  in 
itself  in  numbers.  Much  larger  families  are  found  among  the 
poor  whites  of  the  mountains,  the  foreign  population,  the  rate 
negroes,  and,  in  general,  in  the  lower  ranks  of  labor.  Forces 
are  at  work  to  sterilize  or  reduce  in  number  the  more  intelli- 
gent elements  of  the  population.  The  "new  woman"  move- 
ment, tempting  into  "careers,"  takes  away  from  family  life 
many  of  the  women  most  worthy  to  become  the  mothers  of 
succeeding  generations.  (  Self-interest  is  at  war  with  the 
social  interest^  The  individual  asks,  "Am  I  bound  to  sacri- 
fice my  comfort  and  happiness  to  the  general  good?"  If 
this  continues,  the  result  must  be  a  steady  decline  in  the  pro- 
portion of  the  population  born  of  the  successful  strains  of 
stock,  and  a  steady  increase  of  the  descendants  of  the  medi- 
ocre and  dullgr-witted  elements. 

13 


194 


THE   SUPPLY  OF  LABOR 


[CH.  21 


Rate  of  in- 
crease in  the 
nineteenth 
century 


Conclusion 


5.  Population  increased  at  an  unprecedented  rate 
throughout  Christendom  in  the  nineteenth  century,  but  the 
pace  is  now  slackening.  The  nineteenth  century  saw  a  great 
increase  in  the  food-supplies  available  for  Europe.  The  re- 
sources of  the  American  continent  were  hardly  touched  until 
the  great  Western  movement  of  population  began  and  new 
agencies  of  transportation  brought  American  fields  thousands 
of  miles  nearer  to  European  markets.  The  improvement  of 
machinery  and  of  other  economic  equipment  in  Europe  like- 
wise aided  to  increase  production  rapidly.  Population  fol- 
lowed, though  not  with  equal  step.  Europe  had  a  population 
of  200,000,000  in  1800,  nearly  400,000,000  in  1900.  The  in- 
crease in  England  was  from  12  to  18  per  cent,  each  decade ; 
it  had  8,000,000  in  1800  and  30,000,000  in  1900.  The  United 
States  had  5,000,000  at  the  beginning  of  the  century  and  75,- 
000,000  at  the  close,  an  increase  of  over  30  per  cent,  each 
decade.  Recently  there  has  been  a  notable  decline  in  the 
rate  of  increase  in  all  the  countries  of  Europe.  France  is 
already  at  the  stationary  stage,  and  England  probably  will 
have  reached  it  by  the  middle  of  the  century.  The  rate  of 
increase  by  decades  has  fallen  in  America  from  thirty-three 
to  twenty-four  since  the  Civil  War.  Though  the  movement 
of  the  population  is  still  upward,  large  classes  are  stationary 
or  declining  in  numbers. 

Population  should  increase  more  slowly  than  wealth  and 
resources  if  progress  is  to  go  on.  It  has  done  so  in  the  past 
century,  and  there  is  no  probability  of  a  too  rapid  increase 
in  Christendom  in  the  near  future.  A  stationary  or  declin- 
ing population,  while  not  desirable,  is  not  an  impossibility. 
But  this  does  not  destroy  the  significance  of  the  fact  that 
there  is  inherent  in  humanity  a  great  potential  power  of  in- 
crease, the  realization  of  which  would  be  disastrous,  the  con- 
trol of  which  is  an  important  and  ever-present  condition  of 
the  social  welfare. 


CHAPTER  22 
CONDITIONS    FOR    EFFICIENT    LABOR 

§  I.      OBJECTIVE    PHYSICAL    CONDITIONS 

1.  The  efficiency  of  labor,  in  its  broadest  sense,  is  its  abil-  subjective 
ity  to  render  services  or  produce  things  that  minister  to  ^factor 
welfare.     The  efficiency  of  labor  is  a  resultant  of  many  in-  of  efficienc^\ 
fluences.     In  part  it  depends  on  thev  physical  and  mental 

powers  of  men ;  in  part  on  things  outside  of  the  worker  that 
either  stimulate  and  strengthen  him,  or  give  him  more  fa- 
vorable conditions  in  which  to  work.  These  are  respectively 
the  subjective  and  the  objective  factors  of  efficiency.  In  its 
broader  sense,  therefore,  the  phrase  "efficiency  of  labor" 
implies  any  and  every  influence  that  makes  for  a  larger  and 
better  supply  of  goods. 

2.  The  efficiency  of  labor  is  limited  objectively  by  the  Bounty  ana 
abundance  and  quality  of  material  resources.     Material  re-  s°°5nessof 

productive 

sources  include  both  those  called  natural  (as  the  field  and  agents 
its  fertile  qualities),  and  those  called  artificial  (as  improve-  JJ^*^ 
ments  and  machinery).     According  as  these  resources  are  labor 
more  or  less  developed,  as  labor  is  employed  in  a  fertile  or  a 
barren  field,  with  a  sharp  tool  or  a  dull  one,  with  a  highly 
developed  machine  or  a  poor  one,  the  product  is  more  or  less. 
If  resources  were  much  more   abundant  than  at  present, 
many  goods  now  scarce  would  become  almost,  or  quite,  free. 
In  the  last  chapter  it  was  shown  that  an  increase  of  the 
labor  in  a  limited  area  or  with  a  limited  supply  of  indirect 
agents  results  in  a  decline  in  the  relative  bounty  of  the 
environment.    A  certain  part  of  the  result  is  thought  of  as 

195 


196 


CONDITIONS  FOR  EFFICIENT  LABOR 


[CH.  22 


Causal 
relation  of 
wages  and 
efficiency; 
food 


An  experi- 
ment in 
feeding 


due  to  material  agents,  a  certain  part  to  labor.  "  Efficiency 
of  labor  "  is  thought  of  in  the  narrower  sense  as  the  part  of 
the  product  that  is  logically  attributable  to  labor,— the  labor- 
er's contribution  to  the  value  of  the  product,— as  apart  from 
rent,  the  part  attributable  to  material  resources. 

3.  The  laborer's  efficiency  is  greatly  affected  by  the  qual- 
ity of  his  food,  clothing,  and  shelter.  Usually  workmen  that 
are  getting  good  wages  enjoy  abundant  food  and  creature 
comforts ;  poorly  paid  workers  go  scantily  fed.  The  question 
arises :  which  is  cause,  which  effect  ?  Some  maintain  that  all 
1  that  is  needed  to  make  workmen  more  efficient  is  to  feed  them 
1  well.  In  some  cases  this  is  probably  true.  The  Porto  Ricans 
enlisted  in  the  American  regular  army  are  reported  to  have 
increased  at  once  in  strength,  weight,  and  vigor;  the  Fili- 
pino recruits,  thanks  to  the  American  army  rations,  soon 
outgrew  their  uniforms.  Some  employers  in  Europe  pay 
their  workmen  an  extra  sum  on  condition  that  it  is  spent  for 
meat.  But  if  wages  increase,  it  is  by  no  means  certain  that 
more  or  better  food  will  be  bought  or  if  it  is  that  the  work- 
men's  powers  will  be  increased.  There  is  a  limit  to  the 
benefits  of  increasing  food.  There  is  some  reason  to  be- 
lieve that  in  America  great  numbers  of  our  people,  perhaps 
even  many  manual  laborers,  would  be  better  off  if  the^ 
bought  simpler  and  less  costly  food.  The  maximum  of 
health  and  vigor  may  be  attained  with  moderate  outlay,  and 
beyond  that  point  richer  food  doubtless  does  more  harm 
than  good.  Poor  judgment  in  the  selection  of  food  is  shown 
in  many  workers'  families,  and  there  is  no  appreciation  of 
its  influence  on  health. 

A  few  years  ago  an  experiment  in  the  feeding  of  pigs  was 
tried  on  the  Cornell  farm.  Four  groups  of  six  pigs  each 
were  put  in  four  different  pens  and  fed  four  different  ra- 
tions. Though  alike  in  breed  and  age;  the  groups  began  at 
once  to  differ  in  character.  One  group  squealed  more; 
another  scratched  more;  another  waxed  fat  faster.  Every 
week  they  were  weighed,  and  finally  were  butchered,  hung 


§J]  OBJECTIVE  PHYSICAL  CONDITIONS  197 

up,  and  photographed.  At  that  same  time,  at  the  Elmira 
Reformatory  Mr.  Brockway  was  experimenting  on  some 
criminals  of  the  lower  class.  They  were  given  daily  baths, 
special  physical  exercises,  and  were  fed  on  a  specially  boun- 
tiful diet.  Scientific  philanthropy  stopped  there,  but 
photographs  "  before  and  after,"  reproduced  in  the  printed 
reports,  show  the  great  physical  improvement  that  resulted, 
and  a  marked  change  occurred  likewise  in  disposition  and  in- 
telligence. Many  laboratory  experiments  have  been  made  of 
late  to  test  the  chemical  nature  and  the  physiological  effects 
of  foods.  It  is  becoming  more  fully  recognized  that  the  qual- 
ity and  quantity  of  food,  and  the  cooking  of  it,  have  a  great 
influence  on  the  economic  quality  of  the  worker. 

The  effect  of  the  quality  and  amount  of  clothing,  while  of  Clothing 
course  varying  with  the  climate,  is  in  general  of  less  prac- 
tical importance.  Loss  of  heat  and  energy,  dulling  the 
powers,  stiffening  the  muscles,  causing  illness  with  many 
trains  of  evils,  make  ill-clad  workmen  inefficient.  The  cost 
of  clothing  enough  for  comfort  is,  however,  comparatively 
small,  the  amount  spent  for  ornament  is  comparatively  high. 
Even  more  important  in  its  effects  on  efficiency  is  housing. 
The  conditions  in  the  factory  and  in  the  home  make  for 
health  or  for  disease. 

4.     The  growth  of  society  is,  for  the  average  man,  making  Physical 
some  of  the  conditions  of  efficiency  more  difficult,  others  surrounding 
more  easy,  to  secure.    In  agricultural  and  sparse  populations  labor  grow 
fresh   air,    sunshine,   good   water,   and   unbounded  natural  ™^T°T 
playgrounds  for  children,  where  they  can  grow  into  strong 
and  efficient  manhood,  are  free  goods.    As  population  grows 
more  dense,  these  things  become  more  difficult  to  secure ;  men 
are  brought  into  unnatural  conditions,  the  evils  of  slum  and 
factory  life  develop,  and  the  housing  problem  appears. 

The  character  of  the  housing  and  working  places  could 
well  be  left  to  individuals  in  early  times.  If  the  individual 
chose  to  live  and  work  in  unsuitable  places  and  under  un- 
sanitary conditions,  it  was  usually  his  own  fault  and  he  bore 


198  CONDITIONS  FOR  EFFICIENT  LABOR  [OH.  22 

the  consequences.  When  the  unsanitary  conditions  about 
each  family  are  visited  upon  its  neighbors,  society  must  deal 
with  them.  Engineering,  sanitary  science,  and  medicine 
must  be  directed  against  the  evils;  factory  and  tenement- 
house  legislation  must  seek  to  make  possible  a  decent  life  in 
the  cities,  the  factories,  and  the  homes.  Indeed,  in  many 
places  the  development  in  these  and  other  directions  has 
enabled  the  mass  of  the  workers  to  enjoy  blessings  impossible 
to  the  most  favored  in  the  past. 

§  II.      SOCIAL    CONDITIONS    FAVORING    EFFICIENCY 

Government       1.     The  first  social  condition  for  the  workers'  efficiency 
to  insure       ^  p0nticai  security.    For  the  same  reason  that  this  condition 

the  reward 

to  labor  is  favorable  to  the  growth  of  capital,  it  is  essential  if  men  are 
to  labor  in  the  present  and  for  the  future.  As  the  framers 
of  the  Constitution  expressed  it,  the  function  of  govern- 
ment is  to  insure  domestic  tranquillity,  provide  for  the  com- 
mon defense,  and  insure  the  blessings  of  liberty  to  the 
citizen.  Directness  and  certainty  of  reward  are  more  essen- 
tial than  mere  size  of  reward  in  insuring  action  and  effort. 
There  must  be  a  close  relation  between  work  and  the  fruits 
of  work.  Political  insecurity  weakens  this  relation  and 
makes  the  reward  dependent  on  chance. 

common  '  2.  The  prevalence  of  standards  of  honesty  in  private 
condition^  an^  Pu^c  business  is  a  condition  to  high  efficiency.  Cor- 
efficient  ruption  in  government  has  the  same  effect  as  political  in- 
security; in  fact,  it  is  but  another  form  of  it.  We  are 
accustomed  to  the  thought  that  in  an  Asiatic  despotism 
a  worker  beginning  a  task  is  uncertain  whether  he  will 
reap  the  reward,  as  public  officials  may  at  any  moment 
seize  upon  the  fruits  of  his  labor.  But  in  our  own  country 
similar  evils  are  not  entirely  lacking.  Assessments  often  are 
unfair,  and  justice  sometimes  is  bought.  Men  in  high,  execu- 
tive positions  are  able  to  make  or  mar  the  fortunes  of  their 
followers.  Sometimes  a  legislator  from  a  country  town  goes 


$HJ  SOCIAL  CONDITIONS  FAVORING  EFFICIENCY          199 

to  the  state  capital  poor  and  returns  rich.  Such  things 
becoming  generally  known  tend  to  break  down  the  motives 
to  industry.  They  breed  the  notion  that  wealth  is  more 
dependent  on  chance  or  jobbery  than  on  efficient  service. 
Dishonesty  in  private  business  means  the  use  of  energy  not 
to  produce  wealth,  not  to  add  to  the  sum  for  all  to  enjoy, 
but  to  get  it  from  some  one  else.  Public  corruption  and 
commercial  dishonesty  alike  entail  on  the  industrious  not 
only  the  immediate  loss,  but  the  far  greater  cost  of  weak- 
ened character,  relaxed  energy,  and  decreased  efficiency  of 
labor. 

3.     Custom  and  social  ideals  that  raise  or  depress  hope  Effect  of 
and  ambition,  affect  efficiency.    The  institution  called  caste,  casteon 
which  fixes  the  place  of  the  worker  and  makes  it  impossible  lower  and 
to  rise  out  of  the  social  position  in  which  he  is  born,  and   upper 

classes 

disgraceful  to  do  any  work  reserved  to  other  castes,  is  dead- 
ening to  energy.  It  exists  in  some  form  throughout  the 
world,  and  where  it  is  not  called  by  that  name,  the  same 
caste  spirit  is  at  work.  The  European  peasants  in  the  Middle 
Ages  lived  under  the  shadow  of  it.  Where  slavery  exists 
the  master  class  at  times  feels  its  hardships.  "It  is  not  so 
hard  to  live,"  says  the  hungry  Creole  daughter  in  "  The 
Grandissimes, "  "  but  it  is  hard  to  be  ladies.  .  .  .  We 
are  compelled  not  to  make  a  living.  Look  at  me:  I  can  cook, 
but  I  must  not  cook;  I  am  skilful  with  the  needle,  but  I 
must  not  take  in  sewing;  I  could  keep  accounts;  I  could 
nurse  the  sick;  but  I  must  not."  Nowhere  in  the  world  is 
there  less  caste  than  in  America,  but  it  is  here.  The  negro's 
low  measure  of  industrial  virtues  is  partly  the  cause  of  the 
prejudice  against  him,  but  in  turn  doubtless  inherited  class 
feeling  is  in  some  measure  the  cause  of  his  inefficiency.  To 
close  to  a  worker  all  but  the  menial  occupations  is  to  take 
from  him  the  most  powerful  motives  for  effort.  The  thought 
is  paralyzing.  The  race  problem  in  America  is  in  part  one 
of  caste  sentiment,  whatever  can  or  cannot  be  done  about  it. 
Democracy  makes  for  the  efficiency  of  American  industry 


200  CONDITIONS  FOB  EFFICIENT  LABOR  LCH.  22 

American  not  less  than  do  the  great  natural  resources.  If  America  is 
anTth?07  to  surPass  tne  world  in  all  the  great  industrial  lines,  it  will 
efficiency  of  be  largely  because  of  her  ideas  and  institutions.  They  lead 
to  greater  energy  and  to  a  faster  working  pace  in  all  grades 
of  labor  than  is  found  anywhere  else  in  the  world.  There 
is  danger  that  as  the  West  is  closed  to  settlement  something 
of  the  spirit  of  enterprise  will  be  lost.  To  Western  eyes 
already  the  young  men  in  the  older  East  seem  to  be  tram- 
meled by  social  conventions.  In  an  older  community  there 
is  less  of  hopeful  ambition;  one's  position  depends  more  on 
what  his  fathers  achieved;  in  the  new  community,  more  on 
what  he  does  himself.  If  it  is  true,  as  wise  students  declare, 
that  the  frontier  has  been  the  nursery  of  our  democratic 
ideas,  we  may  well  ask  what  effect  the  closing  of  the  frontier 
will  have  on  our  national  sentiment  and  on  our  material 
prosperity. 

The  balance  4.  Custom  and  national  temperament  affect  the  efficiency 
tagedbe-D~  of  labor  by  determining  the  normal  period  of  labor  time. 
tweenwork  After  the  bare  necessities  of  life  are  provided  for,  the  worker 
j  has  a  wide  or  narrow  margin  of  productive  energy  to  use 
as  he  pleases.  If  four  hours'  work  a  day  would  enable  him 
to  live,  will  he  work  longer  or  will  he  stop?  The  answer  is 
determined  by  the  balance  of  utility  and  disutility.  Will 
additional  hours  of  labor  yield  more  gratification  than  idle- 
ness yields  ?  Does  the  pain  of  toil  repel  more  than  its  fruits 
attract?  The  use  made  of  spare  time  differs  according  to 
climate,  race,  and  temperament.  In  the  tropics  the  margin 
is  converted  usually  into  loafing,  in  the  temperate  zones 
largely  into  objective  forms  of  enjoyment.  Individual  differ- 
ences are  plainly  seen  when  each  man  labors  on  his  own 
field.  The  prudent  man,  in  the  old  maxims,  makes  hay  while 
the  sun  shines  and  ploughs  deep  while  sluggards  sleep.  In 
the  modern  larger  organization  of  industry,  working  hours 
are  much  the  same  for  all  workers  in  the  establishment.  In- 
dividual preferences  are  still  expressed,  however,  in  irreg- 
ularity of  employment.  In  the  South  some  manufacturers 


DIVISION  OF   LABOR  201 

have  found  that  on  an  average'  the  negroes  will  work  in  a 
factory  not  more  than  five  or  six  hours  a  day,  working  ten 
hours  for  four  days  and  lying  off  two  days  a  week.  Such 
a  standard  of  working  hours  is  the  mark  of  the  primitive 
stage  of  wants  and  industrial  qualities,  although  a  shortening 
of  the  hours  of  manual  labor,  as  incomes  increase  above  bare 
subsistence,  is  in  accord  with  a  rational  valuation  of  leisure. 
A  moderate  change  in  that  direction  cannot  but  increase 
rather  than  diminish  the  efficiency  of  labor. 

§  III.       DIVISION    OF    LABOR 

1.  Division  of  labor  is  a  term  expressing  that  complex  Division  and 
arrangement     of    industrial    society     whereby     individual  J^range° 
ivorkers  are  enabled  to  apply  themselves  to  the  production 

of  certain  kinds  of  goods,  securing  others  by  exchange. 
The  term  "division  of  labor"  is  simple,  but  the  thought  is 
a  complex  one.  Its  full  discussion  would  cover  the  whole 
field  of  political  economy,  but  only  its  most  essential  as- 
pects can  here  be  touched  upon.  Division  of  labor  and 
exchange  are  counterparts  and  mutually  determine  each 
other.  'Division  of  labor  depends  on  the  extent  of  the  mar- 
ket, and  in  turn  widens  its  limits.  \  The  number  of  articles 
that  any  one  would  care  to  produce  at  one  time  and  place 
depends  upon  the  opportunity  to  exchange  them.  These  two 
aspects  of  industry  thus  are  inseparable  in  thought  and 
practice.  The  worker  finds  division  of  labor  existing  as  a 
social  institution  and,  according  as  he  adapts  himself  to  it 
wisely  or  foolishly,  it  increases  more  or  less  his  efficiency. 

2.  Division  of  labor  is  primarily   between  individuals,  Division 
but  appears   between  trades,   territories,  and  nations.     In  ^J^rn 
division  of  labor  between  trades,  each  worker  applies  himself  trades  and 
to  the  production  of  some  product  or  group  of  products  and  **mtonea 
secures  other  goods  by  exchange.     A  special  form  of  this  is 
territorial  division  of  labor,   arising  out  of  differences  in 

soil,  climate,  and  natural  products,  when  each  community 


202  CONDITIONS   FOR  EFFICIENT  LABOR  [OH.  22 

develops  in  a  high  degree  some  one  class  of  products  to  ex- 
change in  distant  or  foreign  trade.  Division  of  labor  begin- 
ning because  of  such  natural  differences,  becomes  fixed  by 
habit  and  training,  by  the  advantage  of  a  larger  and  regular 
labor  supply,  by  the 'economy  of  nearness  to  related  and 
tributary  industries,  anmby  the  use  of  waste  products  where 
industry  is  conducted  on  a  large  scale.;  The  natural  advan- 
tages in  another  district  must  be  large  to  enable  it  to  start 
successfully  against  these  acquired  economies,  and  territorial 
division  of  labor  thus  tends  to  continue  for  long  periods 
when  once  established. 

Advantages  3.  Division  of  labor  increases  efficiency  by:  (a)  increas- 
in®  s^^'  W  saving  time;  (c)  saving  tools  and  materials; 
(d)  improving  quality;  (e)  increasing  knowledge;  (f) 
/stimulating  invention;)  (g)  encouraging  enterprise;  (h) 
^-economizing  talent.  There  is  a  tradition  that  an  ingenious 
lecturer  in  one  of  our  universities  was  accustomed  to  give 
to  his  class  eighty  reasons  why  division  of  labor  was  of  ad- 
vantage. It  is  none  too  many,  as  every  reason  for  the 
modern,  as  contrasted  with  the  primitive,  organization  of 
industry  should  be  included.  /The  phrase  division  of  labor 
is  but  a  synonym  for  specialization,  |t  word  that  expresses  all 
that  is  most  characteristic  of  our  complex  industrial  society .J 
The  headings  just  given  may  serve,  however,  to  suggest  the 
leading  phases  of  the  subject. /Repetition  of  the  same  task 
trains  the  muscles,  forms  a  mental  habit,  and  gives  the 
swiftness  and  deftness  of  touch  called  skill.  Specialization 
saves  time  by  making  unnecessary  the  physical  change  of 
place  for  the  worker,  the  frequent  shifting  of  tools,  and 
the  mental  readjustment  required  for  the  undertaking  of 
a  new  task.  Specialization  saves  tools  for,  either  each  kind 
of  work  must  be  most  ineffectively  done,  or  there  must  be 
provided  for  each  worker  a  complete  set  of  tools  which  thus 
will  be  used  rarely  and  will  rust  out  rather  than  wear  out. 
If  a  few  tools  are  thoroughly  used,  they  yield  a  larger  income 
on  the  investment,  and  require  less  care  and  repairs  in  pro- 


DIVISION  OF  LABOR  203 

portion  to  their  uses.  In  fact  this  fuller  economic  use  of 
machinery  and  plant  where  a  large  product  is  turned  out 
at  one  place,  is  a  prime  factor  in  the  advantages  of  large 
production,  a  subject  to  be  treated  elsewhere  much  more 
fully  than  is  here  possible.  By  specialization  is  made  possible 
a  quality  of  goods  never  to  be  secured  by  the  less  skilled 
efforts  of  the  Jack-of-all  trades.  ^  The  specialist  steadily 
grows  in  knowledge  of  his  materials  and  of  the  best  pro- 
cesses, and  he  gains  a  power  of  delicate  observation  and 
facility  in  meeting  new  difficulties  that  are  impossible  when 
attention  is  divided  among  a  number  of  tasks.  :By  dividing 
and  simplifying  processes,  specialization  stimulates  inven- 
tion. The  most  complex  machines  have  been  developed  grad- 
ually by  combinations  and  adaptations  of  simple  tools,  and 
the  more  a  process  is  subdivided,  the  greater  is  the  chance  of 
hitting  upon  a  device  to  repeat  mechanically  the  few  simple 
movements.  Division  of  labor  increases  the  motives  of  emu- 
lation and  enterprise,  by  making  possible  the  more  exact 
comparison  of  results.  It  economizes  talent  by  giving  to 
each  the  highest  task  of  which  he  is  capable,  while  fitting  the 
less  efficient  workers  into  the  minor  places  made  possible  by 
subdivision.  In  an  American  wagon-factory,  a  one-armed 
man  operating  a  machine  is  turning  out  as  large  a  product 
and  earning  as  high  wages  as  any  other  employee.  The  same 
advantages  of  specialization  are  found  with  modifying  con- 
ditions in  educational  and  professional  lines.  The  marvel- 
ous progress  of  science  in  recent  years  has  been  made 
possible  by  each  worker's  doing  a  few  things  and  doing 
them  well. 

4.     The  individual  worker,  to  attain  his  highest  economic  Bestadjust- 
efficiencyf  must  select  from  the  occupations  made  possible  by  2J^t0and 
division  of  labor  the  one  for  which  his  talents  are  best  fitted,  occupation 
It  seems  unnecessary  to  state  this  almost  axiomatic  truth, 
yet  the  slight  reflection  given  to  the  choice  of  an  occupa- 
tion by  most  young  people  gives  to  this  statement  a  very 
practical  bearing.     The  world  is  filled  with  industrial  mis- 


204  CONDITIONS  FOR  EFFICIENT  LABOR  ICH.  22 

fits,  "round  men  in  square  holes,"  good  carpenters  spoiled 
to  ma£e  poor  doctors.  It  so  often  happens  that  the  natural 
aptitude  of  the.  youth  is  the  thing  last  or,  in  any  event,  least 
considered.  Unreasoning  imitation,  family  traditions,  pa- 
rental wishes,  class  pride,  social  prejudice,  childish  whim, 
are  often  decisive  of  the  life  career.  Happily  in  some 
cases,  before  too  late,  the  man  "  finds  himself,"  but  too 
often  the  poverty  of  the  family  and  the  obstacles  to  educa- 
tion preclude  the  exercise  of  intelligent  choice.  It  is  of 
importance  to  society  as  well  as.to  the  individual  that  talent 
should  be  discovered  in  time,  that  tasks  should  be  fitted  to 
aptitudes,  that  each  member'  of  society  should  attain  to  his 
highest  efficiency.  The  approach  to  this  ideal,  made  possible 
by  popular  education,  the  decline  of  caste,  the  spread  of 
genuine  democracy,  the  progress  oiL  social  justice,  will  in- 
crease not  only  tKe  workers'  efficiency,  but  society's  abiding 
,  welfare.  '  * 


CHAPTER  23 
THE    LAW    OF    WAGES 

§  I.      NATURE  OP  WAGES  AND  THE  WAGES  PROBLEM 

1.  Wage  in  the  broad  sense  is  the  income  due  to  labor,  wages  and 
in  distinction  from  that  due  to  the  control  of  material  agents.  rentcom- 
The  uses  of  material  agents,  studied  under  the  subject  of  contrasted 
rent,  are  sometimes  called  "  material  services."  The  adjec- 
tive refers  to  the  source  or  bearer  of  the  use,  and  does  not 
imply  that  the  service  is  to  be  thought  of  as  a  material 
thing.  In  its  last  analysis  ^a  service  is  never  a  material 
thing,  but  a  psychic  effect  on  men  and  their  wants.  Material 
services  and  human  services  are  merely  specific  kinds  of  the 
genus  services  (or  utilities),  and  it  would  doubtless  be  a 
better  usage  to  speak  of  labor's  services  and  wealth's  uses. 
Wages  bear  the  same  relation  to  man's  services  that  rent  does  J 
to  the  material  uses  of  wealth.  Wages  are  more  like  rent 
than  like  interest  in  that  neither  wages  nor  rent  are  ex- 
pressed as  a  percentage.  While  rent  is  the  value  of  the  uses 
of  things,  wages  is  the  value  of  the  services  of  men.  In 
discussing  interest,  wealth  is  capitalized;  but,  in  discussing 
wages,  men  are  thought  of  as  affording  utilities  for  a 
time,  as  is  wealth  under  the  renting  contract.  The  resem- 
blance thus  is  very  close  between  rent  and  wages,  but  not  so 
close  between  wages  and  interest. 

Despite  this  interesting  analogy,  it  is  not  well  to  speak, 
as  some  do,  of  "the  rent  of  labor"— as  well  might  one  speak 
of  the  wages  of  wealth.  Such  a  usage  only  beclouds  the 

205 


206 


THE   LAW   OF    WAGES 


[CH.  23 


Economic 
wages  and 
contract 
wages 


distinction  between  two  concepts,  suggesting  identity  where 
there  are  important  differences.  The  aim  of  scientific  classi- 
fication is  missed  when  contrasts  are  thus  concealed  under 
a  single  term. 

2.  A  law  of  wages  is  a  statement  of  the  relation  of  the 
general   causes   of  value   to   the   value   of  human  services. 
In  real  life  no  one  agent  is  valued  independently  of  other 
goods.    The  felt  importance  of  a  good  depends  on  the  degree 
to  which  other  wants  are  gratified.   If  men  are  starving,  they 
attach   less    importance   to    ornaments;    if   cold,    more    im- 
portance to  clothing  and  fuel,  being  willing  to  part  even  with 
some  needed  food  to  secure  them.     That  is,  man's  desire  for 
each  thing  is  affected  by  his  general  condition  and  by  the  ex- 
istence of  other  goods  and  wants.     A  similar  relation  exists 
between  the  values  of  indirect  agents,  and  must  exist  be- 
tween wages  and  rent. 

We  are  to  discuss  the  law  of  wages.  An  economic  law 
does  not  state  a  command ;  it  is  not  a  political  law ;  it  states 
merely  an  observed  relation.  Things  do  not  need  to  happen 
actually  according  to  any  law  of  wages  that  can  be  formu- 
lated, but  they  will  happen  in  the  measure  that  the  assumed 
conditions  exist.  The  law  states  a  tendency  of  wages,  just 
as  the  law  of  gravitation  states  a  tendency  and  does  not 
predict  positively  whether  a  given  object  will  fall  at  a  given 
moment.  The  "law  of  wages,"  therefore,  is  to  be  under- 
stood as  a  hypothetical  statement  of  the  value  that  will  be 
attributed  to  labor  under  a  givgn_set  of  conditions.^ 

3.  Economic  wages  are  the  value  of  human  services  in 
the  broad  sense;  contract  wages  are  the  goods  paid  by  one 
man  to  another  according  to  an  agreement.     In  discussing 
rent  and  interest,  we  have  become  familiar  with  this  im- 
portant distinction  between  economic  and  contract  values. 
Economic  wages  are  fundamental,  the  primary  subject  of 
theoretical  study.     Contract  wages  are  the  wages  paid  by 
one  man  to  another  in  accordance  with  an  agreement,  and 
may  not   at   this   moment   coincide   with   economic   wages. 


§1]       NATURE  OF   WAGES  AND   THE   WAGES   PROBLEM     207 

When  the  contract  was  made,  one  party  may  have  been 
ignorant  or  helpless,  and  have  failed  to  get  all  he  now  could ; 
or  meantime  the  conditions  may  have  changed.  But  contract 
wages  are  based  on  economic  wages  and  tend  to  conform 
to  them.  If  one  person  performs  services  for  another  with- 
out expecting  to  receive  economic  goods  or  services  in  re- 
turn, it  is  a  gift,  not  wages.  A  workman  can  get  as  contract 
wages  the  amount  of  his  economic  wage  if  free  competition 
exists  and  he  acts  intelligently.  Of  course,  these  are  im- 
portant conditions.  / 

Real  and  nominal  wages  must  be  distinguished :  real  wages 
are  the  reward  of  labor  as  measured  in  goods  and  enjoy- 
ments; nominal  wages  are  the  reward  expressed  in  terms 
of  money,  whose  purchasing  powej*  varies  from  time  to 
time  and  from  place  to  place. 

4.     Human  services,  being  one  of  the  conditions  of  psy-  scarce 
chic  income,  bear  the  same  relation  to  wants  that  material  ser™*8 

gratify 

goods  bear.  As  the  material  agents  that  are  fitted  to  gratify  wants 
wants  are  scarce,  labor  is  applied  to  the  outer  world  to 
change  and  adapt  it,  thus  making  it  answer  desire  better. 
Labor,  thus,  in  many  of  its  applications  merely  supplements 
the  bounty  of  nature.  Men  have  a  use  to  and  for  each  other ; 
they  have  a  relation  to  other  men's  welfare  similar  to  that 
borne  by  material  things.  The  different  human  actions  have 
all  grades  of  relation  to  gratification,  from  harmful  to  help- 
ful, just  as  things  have.  According  to  their  relation  to  this 
scale  services  therefore  become  ranked  either  high  or  low  in 
the  estimation  of  men.  Some  acts  are  negative  services, 
to  use  the  term  service  in  a  paradoxical  sense;  they  are 
things  to  be  avoided  and  escaped.  Value  then  is  attributed  J 
to  the  services  of  men  according  to  their  rank  in  this  scale, 
just  as  it  is  to  the  uses  of  agents  in  the  case  of  rent. 

Scarcity  is  the  condition  of  value  in  labor,  as  it  is  of  value 
in  any  good ;  but  scarcity  is  a  relative  term.  The  commonest 
kinds  of  labor  would  not  ordinarily  be  called  scarce,  but 
compared  with  their  possible  desirable  uses,  they  are  scarce, 


208 


THE   LAW   OF   WAGES 


[CH.  23 


and  this  fact  is  the  key  to  a  large  part  of  the  wage  problem. 
The  question  is:  how  and  in  what  degree  does  this  scarcity 
cause  value  to  attach  to  labor? 


Wages  of 
the  self- 
employed 
exchanging 
worker 


§  II.       THE    DIFFERENT    MODES    OF    EARNING    WAGES 

1.  The  self-employed  laborer  earns  wages  in  the  broad 

f  economic  sense.  In  this  sense  the  isolated  workman,  Robin- 
son Crusoe  on  his  island,  earns  wages,  but  these  wages  could 
not  be  measured  at  all  exactly.  They  are  a  part  of  an  indi- 
visible income,  and  there  is  no  way  to  determine  how  much 
should  be  attributed  to  the  uses  of  the  wealth  employed  and 
how  much  to  the  labor.  The  independent  farmer,  producing 
on  his  own  farm  nearly  everything  he  consumes,  may  be  said 
to  earn  wages  in  the  broad  sense.  These  can,  moreover,  be 
estimated,  because  they  can  be  compared  with  what  he 
could  get  by  working  for  some  one  else.  The  farmer, 
therefore,  attributes  a  certain  part  of  his  income  to  the 
farm  as  rent  and  a  certain  part  to  his  own  labor  as  wages. 

2.  The  wages  of  self-employed  labor  are  often  simply  the 
value  of  the  material  product  it  secures  by  exchange.    Labor 
has  value  indirectly  because  embodied  in  products.     The 
value  of  these  products  is  reflected  to  the  labor  which  secures 
them.    The  wages  of  the  fisherman  day  by  day,  as  he  follows 
his  vocation,  are  simply  the  market  value  of  the  fish  he 
catches  day  by  day.     The  gold-miner,  working  with  simple 
tools  in  the  days  of  placer-mining,   earned  wages  exactly 
expressed  by  the  gold  he  washed  out. 

The  independent  worker  with  few  tools  does  not  think  of 
attributing  any  considerable  part  of  his  income  to  his  tools. 
The  umbrella-mender's  "kit"  is  so  small  that  his  true  wage  is 
little  less  than  his  total  receipts.  The  tinker,  the  shoemaker, 
and  the  tailor,  who  went  from  house  to  house  in  the  old 
days,  thought  only  in  the  vaguest  way  of  marking  off  from 
their  incomes  a  part  to  be  counted  as  the  rent  of  their  little 
outfit  of  tools.  Until  very  recent  times  the  capital  invested 


Ml]         THE  DIFFERENT   MODES  OF   EARNING   WAGES         209 

in  tools  commonly  was  small,  and  usually  was  owned  by  the 
handworker  who  thus  received  an  undivided  income,  of 
which  wages  were  by  far  the  larger  part.  It  was  inevitable, 
therefore,  that  labor  alone  should  have  been  thought  of  as 
the  cause  of  the  value  of  goods  produced  by  the  artisans  in 
the  towns  and  cities.  This  error,  small  at  first,  was  magnified 
as  the  capital  investment  of  modern  industry  grew,  and  it 
persists  in  many  fallacious  notions  that  still  taint  modern 
economic  theory. 

3.  Contract  wages,  paid  by  an  employer,  rest  on  the  same  Both 
cause  of  value,  the  direct  or  indirect  effect  of  labor  in  the 
gratifying  of  wants.  When  contract  wages  come  to  be 
spoken  of,  the  personal  element  of  bargaining  between  man  contract 
and  man  comes  in  to  obscure  somewhat  the  impersonal  causes 
that  are  operating.  If  the  fisher  and  the  miner  bring  their 
products  to  the  general  markets,  the  impersonal  part  of  the 
problem  is  uppermost  and  the  wages  are  recognized  to  be 
the  market  value  of  the  material  products.  But  if  an  em- 
ployer hires  a  number  of  workmen,  and  the  labor  of  each 
becomes  merged  and  lost  to  view  in  a  complex  product,  the 
uncritical  mind  stops,  loses  all  hold  on  a  guiding  principle 
of  value,  and  sees  only  the  superficial  fact  of  a  personal 
bargain  between  employer  and  workman.  Such  a  view  over- 
looks the  logical  cause  of  value,  and  the  network  of  imper-j 
sonal  forces  which  enwraps  and  binds  the  personal  acts. 

To  begin  with  the  simplest  case:  workers  often  are  tern-  A  single 
porarily  employed  to  produce  for  others  means  of  gratifica-  ^^^ 
tion  at  once  consumed.     The  barber  shaves  his  patron,  the   service 
ferryman  takes  the  traveler  across  the  river,  the  boy  carries 
a  message,  the  surgeon  sets  a  broken  bone.     Each  performs 
a  useful  service,  but  produces  no  long-abiding  material  re- 
sult outside  of  the  beneficiary,  and  no  separable,   salable 
material  good.     When  each  is  paid  according  to  the  value 
of  the  gratification  afforded,  the  first  step  is  taken  toward 
the  regular  contract-wage  relation  between  man  and  man. 

In  ordinary  domestic  service  the  only  condition  not  pres- 

14 


210 


THE  LAW  OF   WAGES 


[CH.  23 


ent  in  the  cases  just  given  is  the  more  abiding  character  of 
the  contract  relation.  The  employer  does  not  hire  a  coach- 
man each  time  he  wishes  to  take  a  ride,  but  having  summed 
up  the  advantages  of  a  coachman's  services,  he  buys  them 
by  the  month  or  the  year.  The  price  is  determined  in  the 
market  for  coachmen  of  the  needed  ability,  qualities  ranging 
from  stupid  to  bright,  from  weak  to  strong,  and  from  drunk 
to  sober.  Instead  of  buying  flowers  from  day  to  day,  a 
wealthy  man  hires  a  gardener  to  cultivate  them  in  a  conser- 
vatory. The  average  market  price  of  flowers  influences  the 
wages  paid  to  the  gardener,  his  wages  being  but  the  sum  of 
the  values  (or  of  his  contribution  to  the  values)  of  flowers, 
well-kept  lawn, 'and  garden  products.  According  to  the  con- 
ditions of  each  household  and  of  the  general  market,  the  one 
or  the  other  mode  of  buying  these  utilities  is  the  more  ad- 
vantageous. 

4.  The  payment  of  the  laborer  to  produce  goods  for  ex- 
change is  the  most  common  modern,  case  of  wages.  The 
relation  of  wages  to  the  value  of  the  product  is  in  this  case 
more  complex,  for  the  employer  is  directing  the  labor  to 
gratifying  the  wants  of  others,  not  his  own  wants.  It  is 
the  desire  of  prospective  customers  for  the  product,  and  the 
chance  of  exchanging  it,  that  will  eventually  enable  the 
employer  to  recover  the  amounts  paid  to  laborers.  Labor 
is  only  one  of  the  elements  entering  into  the  product. 
Within  limits  it  may  be  substituted  for  the  other  elements, 
fewer  machines  being  used  and  more  laborers,  or  vice  versa. 
No  more  will  be  given  for  any  labor  than  it  is  expected  to 
add  to  the  value  of  the  product.  As  employers  test  by 
experience  the  contribution  of  the  marginal  labor  to  the 
value  of  the  product,  labor  is  constantly  compared  with  the 
value  of  other  things. 

When  industry  becomes  complex,  the  connection  between 
the  wages  and  the  value  ultimately  realized  in  the  product 
may  be  broken  for  a  time,  but  rarely  for  a  very  long  time. 
Because  of  miscalculations,  labor  is  employed  on  things  that 


• 


§111]  WAGES  AND  THE  LAW  OF  VALUE  211 

prove  to  be  quite  valueless,  and  on  other  things  that  have 
a  much  greater  value  than  was  expected.  When  months  or 
years  intervene  before  the  value  of  the  labor  is  realized  in 
the  sale  of  the  product,  the  employer  must  forecast  the  out- 
come as  best  he  can,  and  employ  labor  only  when  the  wages 
promise  to  be  recovered.  These  are  complicating  facts,  but 
in  any  logical  view  they  do  not  falsify  the  principle  that 
wages  are  determined  by  their  prospective  contribution  to 
the  utility  of  goods. 

5.     The  wages  paid  by  the  various  methods  of  remunera-  various 
tion—as,    by    time,    by  the    piece,    by    premium    for    out-  methodsof 
put — all  conform  in  a  general  way  to  the  economic  value  tion,  but 
of  the  service.    Many  methods  are  employed  to  measure  the  ™e«eneral 
services  of  wage  workers.     If  time  is  used,  a  general  or 
average  output  is  assumed,  and  the  workman  must  come  up 
to  that  standard  if  he  is  to  hold  his  place.     If  payment  is 
by  the  piece,  the  price  per  piece  must  be  enough  to  make 
possible    the    prevailing    time-wage    to    workers    of    that 
grade  if  the  supply  is  to  be  maintained  in  that  industry. 
The  convenience  of  the  different  methods  of  payment  varies 
from   industry  to   industry,   and  even   from  task  to   task 
within  the   same   factory,   so   that  now   one,   now  another 
method  is  followed.    In  any  case,  however,  the  aim  is  to  find 
some  convenient  measurement  of  the  rate  of  labor,  and  of 
its  contribution  to  the  value  of  the  product. 

§  IH.      WAGES  AS  EXEMPLIFYING  THE  GENERAL   LAW  OF  VALUE 

1.     Each  grade  of  labor  is  a  potential  supply  of  desirable  Ratio  of 
things  and  its  wage  is  determined  in  essentially  the  same  way  J^jjj^f8  ° 
as  if  it  were  an  actual  supply.    If  all  the  various  psychic  adjusted  to 
goods  that  labor  produces  were  spread  out  before  men  in 
visible  form,  some  would  be  in  great  demand,  some  would 
exchange  in  a  very  unfavorable  ratio  with  others.     The  ex- 
change would  come  to  equilibrium  at  a  point  where  each 
buyer  had  adjusted  his  supply  of  enjoyments  in  the  most 


212 


THE  LAW  OF   WAGES 


[CH.  23 


favorable  way,  had  so  distributed  his  purchasing  power  as 
to  get  those  kinds  and  amounts  of  services  which  afford  him 
the  highest  possible  sum  of  enjoyment. 

In  this  situation  the  real  wages  of  some  being  so  much 
more  than  those  of  others,  the  low-paid  workers  will  have  a 
motive  to  change  their  occupations.  But  the  various  laborers 
have  limited  abilities  and  cannot  change  at  will  and,  despite 
the  unfavorable  ratio,  they  may  be  compelled  to  continue 
at  the  same  work.  Just  as  apples  cannot  become  peaches  or 
sheep  become  horses  when  there  is  a  change  in  their  price, 
so  the  unskilled  workman  cannot  become  skilled  quickly, 
if  he  ever  can,  and  the  possibility  of  changing  occupations 
within  any  reasonable  period  is  very  small  indeed.  Labor 
is  constantly  trying  to  adjust  itself,  to  get  into  the  better- 
paid  industries.  It  moves,  it  emigrates,  it  seeks  training  and 
education.  Especially  the  workers  between  the  ages  of  fif- 
teen and  twenty-five  choose  the  callings  that  promise  the 
highest  reward.  Within  limits  an  adjustment  is  possible,  but 
these  limits  are  not  wide  and  not  quickly  shifted,  and  the 
wages  of  labor  continue  diverse  in  different  occupations  for 
an  indefinite  time. 

2.  The  term  general  rate  of  wages  can  be  used  only  of 
a  certain  grade  of  labor  and  of  the  rate  for  the  average 
worker.  Every  grade  and  kind  of  ability  has  its  rate  of 
wages.  To  be  sure,  it  is  sometimes  convenient  to  speak  in 
a  broad  but  inexact  way  of  "  a  general  rate  of  wages, " 
when  comparing  different  countries  and  periods.  When  it 
is  said  that  the  rate  of  wages  is  higher  in  America  than  in 
England,  in  England  than  in  France,  in  France  than  in 
India,  the  comparison  is  between  men  of  the  same  occupation 
in  the  different  countries;  e.g.,  the  unskilled  laborer  or  the 
mechanic  gets  more  here  than  the  same  grade  of  laborer 
gets  in  England.  There  is  no  such  thing  as  a  general  rate 
of  wages  extending  throughout  all  industries. 

The  different  grades  of  ability  differ  more  markedly 
in  wages  than  do  industries  compared  as  wholes.  In 


$ni]  WAGES  AND   THE   LAW  OF  VALUE  213 

the  manufacture  of  cloth  all  grades  of  ability  are  required, 
from  the  highly  paid  artist  and  engineer,  down  to  the  roust- 
about in  the  yard.  The  industries  of  manufacturing,  com- 
merce, and  education  alike  require  the  cooperation  of  book- 
keepers, janitors,  carpenters,  and  superintendents.  It  is  easy 
in  most  cases  to  pass  from  any  grade  of  occupation  in  one 
industry  to  a  corresponding  grade  in  another  industry;  but 
it  is  difficult  to  pass  from  a  lower  grade  to  a  higher  grade 
injthe  same  or  another  industry. 

/Abstractly  considered,  that  is,  wherever  free  competition  Equilibrium 
exists,  there  is  a  constant  tendency  toward  a  state  of  equi-  ofservices 

,.,     .  .  ~~. —    .  and  wages 

librium ;  each  workman  is  moving  into  the  industry  where 
he  earns  the  highest  possible  amount,  and  where  he  receives 
just  what  his  fellow-men  estimate^  his  importance  to  be, 
judged  by  the  service  he  performs,  y^ach  man's  place  is  de- 
termined by  his  specific  gravity^  just  as  the  place  of  liquids 
poured  into  a  glass  is  determined  by  their  density.  There 
is  much  reason  to  believe  that  this  condition  is  approached 
actually  in  a  far  greater  degree  than  is  thought  by  those 
who  come  to  the  question  with  preconceived  notions  of  what 
ought  to  be,  or  of  what  they  would  like  to  see.  This  principle 
of  the  economic  wage  does  not  preclude  the  questioning  of 
the  justice  of  existing -institutions,  but  it  is  a  guide  in  the 
discussion  of  all  practical  problems  of  wages. 

3.  The  law  of  wages  may  be  stated  thus:  in  any  state  of  wa 
the  labor  market  the  wages  of  any  labor  or  class  of  labor  is 
equal  to  its  marginal  contribution — that  is,  to  the  value  of  ma 
its  products.  Each  agent  in  industry,  whether  it  be  a  plough, 
a  horse,  or  a  man,  is  valued  in  connection  with  other  agents, 
never  apart  or  isolated.  It  is  not  the  total  service  any  one 
of  them  performs  that  can  be  got  at;  all  that  can  be 
got  at  is  the  utility  attributed  to  the^last  unitx  of  supply. 
Their  marginal  contribution  determines  their  importance. 
Each  agent  is  considered  in  combination  with  other  things 
at  a  given  moment  under  existing  conditions  of  supply. 

This  statement  of  the  law  of  wages  is  broad,  and  appears 


214 


THE  LAW  OF  WAGES 


Wages  ex- 
emplify the 
general  law 
of  value 


[CH.  23 


to  be  modified  in  many  ways  in  practice:  by  changes  in 
industry,  by  ignorance  on  the  part  of  the  worker,  by  unequal 
skill  in  bargaining;  but  the  law  of  wages  just  stated  allows 
for  these  modifications,  and  is  a  guide  amid  the  complexity 
of  facts,  for  it  gives  a  place  to  the  influence  of  trade  unions, 
caste,  and  everything  else  that  affects  the  labor-supply .  ^The 
law  of  wages  is  but  the  general  law  of  vajue,  forking  itself 
out  amid  the  special  conditions  accompanying  the  gratifica- 
tion of  wants  by  human  effort. 


CHAPTER  24 
THE  RELATION  OF  LABOR  TO  VALUE 

§    I      RELATION  OF   RENT   TO  WAGES  * 

1.  The  law  of  wages  must  be  considered  in  connection  concrete 
with  other  far-reaching  influences.     One  may  use  the  sen-  conditions  of 
tence,    "  the    marginal    productivity    of    labor    determines  must  be" 
wages,"  without  having  a  true  understanding  of  its  mean-  8tudied 
ing.     Memorizing  a  definition  is  only  the  first  step  toward 
economic   reasoning.      Till  that   definition   becomes   a   real 

thing  in  the  student's  thought  it  helps  him  but  little.  The 
law  of  wages  is  an  abstract  statement  of  the  logical  relation 
of  wages  to  utility;  it  is  not  a  concrete  statement  of  the 
industrial  conditions  in  which  labor  works,  yet  these  are 
more  nearly  in  the  nature  of  true  causes  of  value.  The 
marginal  utility  is  itself  determined  by  forces  and  conditions 
outside  of  labor  that  are  constantly  changing.  The  more 
thorough  is  the  student's  knowledge  of  the  actual  conditions 
of  industry,  the  more  correctly  he  can  apprehend  the  rela- 
tions of  wages  to  other  incomes,  and  the  more  wisely  he  will 
apply  the  abstract  law  to  practical  life. 

2.  The  marginal  productivity  of  labor  is  affected  by  the  produc- 
relative  abundance  and  efficiency  of  natural  resources.     If  1  vityot 
land  suddenly  becomes  more  abundant  through  the  opening  diminishing 
up  of  new  continents,  the  lower  grades  of  agents  are  sooner  retximsof 

natural 

or  later  abandoned.     Labor  having  more  of  a  choice  as  to  agents 
the  place  where  it  is  to  be  used,  spreads  itself  over  the 
better  grades  and  takes  on  a  greater  marginal  productivity. 
The  marginal  unit  of  labor  working  on  better  soil  than  before 

215 


216       THE  RELATION  OF  LABOR  TO  VALUE     [CH.  24 

produces  more,  and  wages  expressed  in  produce  are  higher. 
Ground  rent,  on  the  other  hand,  is  less  under  these  condi- 
tions. If,  however,  the  land  is  fixed  in  area,  and  population 
increases,  no  other  change  taking  place,  the  principle  of 
diminishing  returns  applies.  The  marginal  laborers  (the  last 
arrivals  or  the  growing  generation)  being  compelled  to  work 
with  less  efficient  resources  on  a  poorer  quality  of  land, 
produce  less  than  was  the  rule  before,  and  a  smaller  product 
therefore  is  attributed  to  all  the  laborers  of  that  grade. 
They  get  lower  wages  and  more  goes  as  rent  to  the__owners 
of  the  lancU— By  shifting  of  occupations  this  reduction  may 
be  somewhat  moderated  and  equalized  among  the  workers 
in  other  industries.  In  both  these  cases,  wages  vary  more 
than  does  the  physical  amount  of  the  total  product.  In  the 
first  case,  wages  are  a  larger  proportion  of  a  larger  product ; 
in  the  second  case,  the  product  is  larger  (there  being  more 
laborers)  but  wages  are  a  smaller  proportion  of  it. 

3.  The  unwarranted  assumption  that  a  disproportionate 
increase  in  population  is  sure  to  occur,  gave  rise  to  the  sub- 
sistence theory,  or  iron  law  of  wages.  This  assumption  is 
now  seen  not  to  correspond  with  what  is  occurring  in  the  civ- 
ilized world.  A  hundred  years  ago,  however,  when  the  poorer 
classes  of  Europe  appeared  to  be  increasing  with  little  re- 
straint, it  was  not  strange  that  thinkers  should  look  upon 
this  increase  as  inevitable.  According  to  the  subsistence 
theory,  the  question  of  population  was  simply  a  question  of 
food ;  it  was  believed  that  men  surely  would  multiply  up  to 
the  point  where  they  could  not  further  increase  their  num- 
bers, and  starvation  wages  would  be  the  rule.  It  was  this 
way  of  looking  at  things  that  gave  to  political  enonomy  the 
name  of  the  dismal  science.  When  population  is  limited  in 
large  measure  by  volitional  means  instead  of  by  war,  starva- 
tion, and  other  material  means,  the  problem  changes  and  the 
error  in  such  a  theory  of  wages  becomes  clear. 

The  "standard  of  living"  theory  of  wages  is  a  refined 
form  of  the  subsistence  theory.  This  theory  is  that  wages 


§1]  RELATION  OF   RENT   TO  WAGES  217 

must  rise  to  meet  the  cost  of  any  standard  that  the  laborers  Thestan- 

may  set,  and  below  which  they  wiU  refuse  to  multiply.    This  dard  of 
is  probably  a  fragmentary  truth,  but  is  quite  inadequate  as          '  " 


a  theory.  A  high  standard  of  living  and  all  the  social  insti- 
tutions and  customs  that  aid  in  keeping  the  population  from 
too  rapid  increase,  are  factors  in  determining  ultimately  the 
marginal  productivity  of  labor  and,  hence,  the  height  of 
wages.  If  these  restraining  influences  suddenly  were  with- 
drawn, a  reduction  of  wages  would  follow  slowly  because  of 
the  diminishing  returns  of  material  agents.  But  the  stan- 
dard of  living  is  merely  a  partial  and  negative  factor.  No 
limitation  of  the  number  of  workers_jcan_^ajse  wages 
their  productive  contribution_and,  in  the  present  state 
industry,  a  considerable  falling  off  in  population  might  be 
expected  to  result  in  a  loss  of  enterprise,  of  cooperation, 
and  of  capital.  The  positive  factor  in  wages  is  productivity. 

4.  An  increase  of  population  more  rapid  than  that  of  H  labor 
the  artificial  industrial  agents  would  reduce  marginal  pro-  j£creases 
ductivity.    Labor  makes  use  of  many  kinds  of  agents  besides  wealth, 
the  so-called  natural  resources.     If  population  is  stationary  **&<***& 
while  tools   are  allowed  to  wear  out  or  if   an  increasing 
population,  while  opening  up  a  proportionate  supply  of  land        JV 
for  food,  fails  to  accumulate  a  proportionate  stock  of  other    \Jr 
tools,   the  marginal  productivity  of  labor  must   diminish. 
Labor  would  be  more  imperfectly   equipped  with  spades, 

hoes,  wagons,  horses,  cattle,  machinery.  These  artificial 
agents  help  in  getting  not  only  manufactured  products,  but 
food  products.  The  equipment  of  labor  must  keep  pace  with 
the  number  of  workers  or  they  will  be  forced  to  the  lower, 
or  less  effective,  uses  in  the  tools.  On  the  other  hand,  the 
growth  of  science  and  invention,  and  the  growth  of  wealth 
faster  than  the  population,  equipping  labor  as  it  does  with 
more  efficient  implements,  cause  the  marginal  productivity 
of  labor  to  rise,  and  hence  also  the  wages. 

5.  The  "wage-  fund  theory"  was  an  imperfect  percep- 
tion of  this  truth  that  wages  are  influenced  by  the  efficiency 


218 


THE  RELATION  OF  LABOR  TO  VALUE 


tCH.  24 


The  wage- 
fund  theory 
explained 


of  the  industrial  equipment.  As  the  subsistence  theory  took 
a  partial  view,  looking  at  agricultural  land  fl,1nr>p  gg_fh^ 
dete£minajat_of_wagesL  so  the_wage-f und  jheory  looked  alone 
ata  portion  ^f_the_capita1  in  thp  hands  of  pmployers  wfrio.l) 
was  the  fundjfrom  which  waffes__w-ere  paid.  The  large 
part  played  in~discussion  by  this  doctrine  and  the  strong 
hold  it  had  on  thought  is  somewhat  puzzling  now ;  for  if  one 
begins  to  doubt  its  entire  truth  it  is  difficult  to  be  quite 
just  to  its  merits  or  to  state  it  in  a  form  that  is  plausible. 
\_The  theory  was  that  wages  depended  on  the  amount  of 
capital  that,  in  some  way  not  clearly  seen,  was  set  apart 
by  employers  for  the  payment  of  wagesTl  The  capital  making 
up  the  fund  out  of  which  wages  were  supposed  to  be  paid, 
was  only  a  very  sj3^11<_^a^Lo|jt}Lc^£ii^^even  ^n  *ne  narrow 
sense  in  which  that  term  was  then  used.  It  was  assumed  that 
this  wage  fund,  once  set  aside,  was  necessarily  paid  out  to 
laborers,  wages  being  therefore  determined  by  simple  divi- 
sion :  laborers  were  the  divisor,  the  wage  fund  the  dividend, 
and  the  average  wage  the  result.  When  the  theory  is  thus 
baldly  expressed, 


The  wage- 
fund  theory 
a  partial 
truth 


ofjthe_factsj^nd  the  wage  fund  appears  to  be  rather  the 
arithmetic  sum  of  variously  determined  payments  than,  in 
any  sense,  the  cause  of  wages. 

The  abler  wage-fund  theorists  did  not  fail  at  times  to 
see,  though  too  dimly,  as  the  determining  causes  behind  the 
employers'  action,  certain  other  things,  such  as  the  material 
facilities,  the  desires  of  consumers,  the  capabilities  of  the 
workers,  and  the  resulting  value  of  the  labor.  The  element 
of  truth  which  still  should  be  recognized  in  this  theory 
is  that\Jhe  relation  of  labor  to  its  equipment  influences  its 
efficiency,  and  determines  the  part  of  the  product  to  be  set 
aside  for  wagesTf  In  that  sense,  wages  are  related  to  the 
abstinence  of  capitalists  and  to  the  supply  of  " capital," 
but  capital  understood  not  as  a  special  fund  of  the  em- 
ployers, but,  in  a  broader  sense,  as  labor's  entire  environ- 
ment of  indirect  agents. 


§11]  RELATION  OF  TIME- VALUE  TO  WAGES  219 


§  II.      RELATION  OF  TIME-VALUE  TO  WAGES 

1.  The  services  of  labor,  whether  for  one's  self  or  others,  Labor  may 
have  a  more  or  less  immediate  relation  in  time  to  the  gratify-  J^Stime 
ing  of  wants.     While  all  human  efforts  to  which  the  term  fromgrati-' 
services  is  applied  have  a  relation  to  wants,  there  is  much  fications 
diversity  in  their  nearness  to  the  gratification  for  which 

they  are  destined.  The  process  may  be  technically  round- 
about, to  use  the  language  of  recent  economists.  One  may 
break  a  stick  from  a  tree,  pick  up  a  stone  and  drill  a  hole 
in  it,  catch  an  animal,  cut  thongs,  tie  the  handle  to  the 
stone,  and  use  it  as  a  weapon  to  kill  other  animals  for 
food,  the  first  step  being  taken  with  the  last  object  in  view. 
But  a  still  more  essential  relation  we  have  seen  to  be  the 
relation  in  time.  Some  things,  some  goods,  are  used  at  once, 
some  after  a  long  interval;  some  are  durable,  others  perish- 
able. Labor  produces  a  song  or  a  glass  of  lemonade  to  be 
consumed  on  the  instant;  it  is  employed  on  bridges,  monu- 
ments, railroads,  or  interoceanic  canals  lasting  for  centuries. 
In  all  these  cases  the  general  object  sought  is  the  same 
though  very  different  intervals  of  time  must  elapse  before 
the  gratification  matures. 

2.  As  different  periods  of  time  must  elapse  before  services  AU  future 
are  enjoyed,  the  expected  value  of  all  products  but  those  ^^re°f 
immediately  available  is  discounted  in  advance.    The  services  discounted 
that  afford  gratification  immediately,  and  those  that  afford  toT^j. 
gratification  at  a  later  time,  are  judged  and  compared  at  one  value 
and  the  same  moment.    All   economic  life  centers  in  the 
present.     This  difference  in  the  time  of  services  surely  can- 
not be  ignored.     If  Robinson  Crusoe,  at  work  on  his  island 

with  his  limited  supply  of  energy,  continues  to  provide 
for  next  year's  enjoyment,  neglecting  the  present,  present 
goods  become  scarce  and  their  utility  rises  as  compared  with 
the  future  goods  the  same  labor  secures.  To  escape  incon- 
venience, and  in  the  extremest  case  to  escape  starvation, 


220 


THE   RELATION  OF   LABOR   TO  VALUE 


[CH.  24 


Crusoe  would  be  compelled  to  restore  the  equilibrium  be- 
tween the  wants  of  the  two  periods  by  shifting  his  labor 
back  to  the  present.  So  in  each  little  economic  group  and  in 
our  complex  society  there  is  constant  rivalry  of  present  and 
future  wants,  competing  for  the  limited  present  supply  of 
labor.  The  present  says,  "  Give  me  your  labor  and 
I  will  give  you  the  fullest  enjoyment."  The  future  says, 
"  I  will  give  you  a  greater  gratification,  but  you  must  wait 
for  it."  A  given  labor  force  thus  making  possible  a  wide 
range  of  choice  among  present  and  future  services,  labor 
is  distributed  according  to  the  prevailing  rate  of  time-value, 
which,  as  we  have  seen,  is  approximately  expressed  by  the 
rate  of  interest.  If  the  rate  of  interest  is  high,  it  means  that 
the  present  is  urgent  and  will  not  easily  yield  to  the  future. 
If  the  rate  is  low,  it  implies  that  the  present  is  comparatively 
well  provided  for,  and  that  future  wants  are  given  more 
consideration. 

3.  The  employer  in  hiring  labor  and  producing  goods 
lakes  account  of  these  time  differences.  In  the  preceding 
paragraph  has  been  noted  the  influence  of  time  differences 
in  the  simplest  problem  of  economic  wages.  Interest  is  like- 
wise taken  account  of  in  the  bargains  between  workman 
and  employer,  by  which  contract  wages  are  fixed.  The 
employer  of  labor  works  subject  to  a  prevailing  rate  of 
interest.  If  he  ignores  it  he  must  lose.  He  should  direct  a 
given  amount  of  labor  to  products  that  mature  next  year 
only  when  their  expected  selling  price  is  greater  than  that 
of  products  that  can  be  marketed  this  year.  This  difference 
due  to  time  can  no  more  be  ignored  than  can  any  other 
difference  in  the  cost  of  products.  If  the  employer  keeps 
the  future  goods  to  sell  later,  they  will  normally  increase  in 
value  as  they  approach  maturity;  if  he  markets  the  goods 
at  once,  he  normally  must  pass  on  to  the  purchaser  the 
benefit  of  the  discount  he  has  made  on  their  future  value. 
That  is  to  say,  it  is  not  the  employer  of  labor,  the  purchaser 
of  labor  as  such,  who  gains  by  discounting  the  future  value 


$H]  RELATION   OF   TIME-VALUE  TO   WAGES  i521 

of  labor;  it  is  the  investor  of  capital  (whether  employer  or 
later  purchaser)  who  secures  the  rent  as  it  matures. 

4.  Hence  all  wages  paid  for  help  on  products  that  are  Tnedis- 
remote  are  based  on  the  present  worth,  or  discounted  value,  future  value 
of  the  future  gratification  to  which  the  labor  contributes,  of  services 
The  idea  is  held  in  one  form  or  another  by  all  radical  socialis- 
tic writers,  that  the  laborer  does  not  get  the  full  value  of  his 
products.     In  the  sense  that  is  here  discussed,  he  does  not. 

He  does  not  get  what  the  product  will  sell  for  in  the  fu- 
ture. He  gets  the  probable  future  value  at  its  present 
worth,  discounted  at  the  prevailing  rate.  That  part  of  the 
employer's  gains  corresponding  to  this  discount  on  labor  is 
economic  time-value. 

Nor  is  this  discount  of  future  services  dependent  on  a 
political  system  or  on  private  property  or  on  the  wage 
system,  as  some  have  assumed.  It  is  a  universal  truth.  It 
is  in  the  naturp  nf  wants  that  present  and  fntnrp  should 
differ^  A  communistic  or  socialistic  state  would  have  to 
take  account  of  this  difference,  else  the  whole  social  economy 
would  be  irrational  and  there  would  be  no  principle  by 
which  to  apportion  in  time  the  productive  forces  of  the  com- 
munity. Contracts  to  pay  interest  and  contracts  to  pay 
wages  might  be  forbidden  and  made  criminal  by  formal  law, 
but  time-value  would  persist. 

5.  Wages  and  rent  are  coordinate  species  of  the  value  Relations  of 
problem;  time-value  is  a  different  kind  of  problem,  bearing  ^f'ana 
to  both  the  other  problems  a  similar  relation.     A  close  ex-  time-value 
animation  of  the  problems  of  rent  and  wages  serves  to  bring 

out  the  close  parallelism  of  these  two  forms  of  income  as 


here  denned.  Rent  is  the__value-of .  the  usufruct  of  wealth, 
wages  are  the  value  of  the  usu|ruct_.  of  labor.  The  bearer 
of  the  use  in  one  case  is  material  goods,  in  the  other  is 
human  agents.  Different  in  the  source  of  use,  they  are  in 
large  measure  alikejn  the  form  of  contract,  or  nature  of 
the  calculation.  Together  rent  and  wages  comprise  the  value 
of  all  currently  arising  uses;  they  are  the  two  coordinate 


222 


THE  RELATION  OF  LABOR  TO  VALUE 


[CH.  24 


, 


species  of  the  genus  "value  onuses."  The  two  groups  of 
uses  are  closely  interrelated  in  practice,  each  acting  and  re- 
acting on  the  value  of  the  other. 

Time-value  is  a  different  genus  of  the  value  problem. 
Having  to  do  with  time  differences,  it  must  be  found  in  con- 
nection with  every  use  that  is  not  immediate,  whatever  be  the 
bearer  of  that  use.  Its  application  to  rent  is  more  frequent 
and  obvious,  as  only  the  uses  of  material  agents  are  capital- 
ized, that  is,  sold  in  perpetuity.  Moreover  any  service  of 
labor  that  is  not  at  once  consumed  is  fixed  in  material  form 
and  appears  thenceforward  as  wealth  whose  uses  are  yielded 
as  rent  or  as  consumption  goods. 


§  III.      THE   RELATION   OF   LABOR   TO   VALUE 

1.  Labor  is  a  cause,  but  only  one  of  the  causes  of  value. 
A  cause  is  some  one  condition  which  is  seen  to  be  neces- 
sary to  the  existence  of  a  thing,  and  usually  that  condition 
which  brings  the  thing  about,  other  things  being  assumed. 
In  what  sense  ought  a  cause  of  value  be  spoken  of?  {In 
one  sense  it  is  in  the  minds  of  men— it  is  their  wants;  again, 
looked  at  objectively  it  is  in  the  nature  of  the  good— it  is  the 
quality  that  fits  it  to  gratify  the  want.     But  if  both  these 
causes  are  operative,  and  labor  is  applied  to  fit  goods  better 
to  gratify  wants,  labor  appears  as  the  cause  of  value!)  Per- 
sonal  causes   are   so   much   more   evident,    an   explanation 
through  personal  causation  is  so  much  more  satisfying  in  the 
earlier  stages  of  scientific  inquiry,  that  labor  long  continued 
to  be  looked  upon  as  the  one  source  of  value.    This  erroneous 
view  has  never  quite  ceased  to  influence  economic  thought, 
and  a  great  deal  of  effort  has  been  directed  to  formulating 
theories  of  value  based  upon  it.     The  cruder  form  of  the 
error  has  now  almost  disappeared,  but  in  various  little  rec- 
ognized ways  it  still  persists. 

2.  Economic  production  is  the  origin,  or  genesis,  of  value 
finding  its  source  either  in  objective  things  or  in  services. 


U:^ 
5  HI]  THE   RELATION  OF   LABOR   1*0   VALUE  223 


The  writers  of  fifty  years  ago  defined  economic  production 
as  the  application  of  labor  to  the  creation  of  wealth.  But  as 
there  are  two  factors  in  production,  man  and  material  things, 
so  there  are  two  productive  sources  of  value.  In  some  cases 
the  origin  of  value  is  attributable  to  man's  action;  in  other 
cases  scarce  uses  arise  in  objective  things  without  man's  ac- 
tion. Broad  as  is  this  definition  of  production,  it  does  not 
include  the  enjoyment  of  free  goods,  as  in  the  case  of  the 
care-free  darky  basking  in  the  sun.  Anything  that,  causing 
a  feeling  of  greater  importance  to  attach  to  a  thing,  changes 
it  from  a  free  good  to  a  scarce  good  or  makes  it  more  scarce, 
is  a  cause  of  its  value.  A  large  rainfall  causing  a  greater 
crop  of  grain  may  be  thought  of  as  producing  utility.  The 
regular  surplus  of  value  attributable  to  the  waterfall  or 
to  the  railroad,  is  the  product  of  the  material  services  of 
wealth. }  Production  through  human  action  is  the  more  obvi- 
ous and  is  the  more  usually  thought  of ;  the  part  of  material 
agents  must  be  recognized  if  the  fallacies  of  the  labor  theory 
of  value  are  to  be  avoided. 

3.     Human  activity  is  directed  to  shaping  and  arranging  Labor ap- 
things  so  as  to  increase  their  want-gratifying  power.    Human  Plied  to 
and  non-human  agents  are  combined  in  different  proportions  utmty 
in  various  products.    In  one  thing  more  land  and  machinery 
are  used,  in  another  more  labor  is  used.    But  either  of  these 
two  great  classes  of  agents  may  touch  the  vanishing  point 
in  the  production  of  value.     While  it  is  true  that  man's 
part  is  the  most  striking  aspect  of  production,  yet  there 
may  be  value  without  labor.     The  study  of  rent  puts  this 
abstractly,  but  in  a  clear  light.     In  actual  life,  however,  a 
part  of  the  value  is  usually  attributable  to  rent,  a  part  to 
labor. 

But  in  what  sense  is  even  this  part  attributable?  Not  in 
the  sense  that  the  labor  is  the  original  source  of  value  which 
imparts  that  value  to  its  products.  The  usufruct  of  wealth 
is  the  basis  of  rent;  the  need  to  pay  rent  is  not  the  cause 
of  value  in  the  product.  Likewise,  product  is  the  basis  of 


224 


THE  RELATION  OF  LABOR  TO  VALUE 


[CH.  24 


Value  of 
labor  de- 
rived from 
its  products 


No  unit  of 
labor  to 
serve  as  a 
standard  of 
value 


wages,  labor  is  not  the  origin  of  value.  Labor,  like  the 
forces  and  qualities  of  wealth,  is  the  cause  of  technical 
changes.  These  changes,  if  favorable,  cause  the  goods  to  take 
on  a  higher  value  which  is  reflected  back  to  the  labor.  The 
labor  itself  has  not  a  predetermined,  ascertainable  value,  but 
only  a  resultant,  derived  value.  An  exception  to  this  state- 
ment appears  on  a  superficial  view  of  the  value  of  labor 
hired  under  the  wage  contract  to  make  a  particular  product. 
The  labor  having  a  market  value  because  of  a  large  number 
of  well-known  alternate  uses,  can  be  diverted  to  a  particular 
use  only  on  condition  of  a  definite  payment.  Labor  here,  as 
viewed  by  the  employer,  appears  to  have  an  original  value ; 
products,  a  derived  value.  But  in  the  logical  view,  labor  is 
seen  to  impart  technical  qualities  to  the  goods;  in  turn,  the 
goods  to  impart  value  to  the  labor.  Man  hunts  throughout 
industry  for  those  things  to  which  his  labor  can  be  applied 
usefully.  He  foresees  in  them  the  changes  that  will  increase 
the  value.  It  is  only  as  he  has  judged  rightly  that  the  value 
taken  on  by  the  things  is  reflected  back  to  the  labor  at- 
tributed to  it. 

4.  Labor  being  of  many  qualities  and  receiving  many 
rates  of  pay,  there  is  no  unit  of  labor  that  can  be  used  as  a 
measure  of  value.  The  idea  of  finding  in  a  "unit  of  labor" 
an  objective  standard  of  value  to  which  the  value  of  all 
other  things  could  be  reduced  has  been  a  very  attractive  one. 
This  fallacious  hope  animates  every  one  beginning  to  think 
of  the  value  problem.  The  thought  was  so  plausibly  formu- 
lated by  Ricardo  that  it  continued  for  a  long  time  to  be  the 
generally  accepted  doctrine  of  value.  Although  most  writers 
reject  the  formal  statement  of  the  labor  theory  of  value, 
use  is  frequently  made,  even  now,  of  the  phrase  "unit  of 
labor,"  suggesting  the  thought  that  labor  is  the  standard  by 
which  the  value  of  all  goods  may  be  measured.  This  unit  of 
labor  of  the  text-books  may  be  seen  to  be  either  labor  arbi- 
trarily assumed  to  be  of  uniform  quality  and  quantity,  as  a 
day  of  unskilled  labor  (in  that  form  quite  incomparable  as 


.  m]       THE  RELATION  OF  LABOR  TO  VALUE       225 

to  amount  with  other  qualities),  or  a  given  amount  of  money 
invested  in  labor  of  different  grades  at  its  market  value. 
It  is  only  by  expressing  labor  in  terms  of  its  value  that  the 
various  grades  of  skilled  and  unskilled  labor  can  be  reduced 
to  a  homogeneous  unit,  which  is  but  a  unit  of  money  wages. 
This  should  not  deceive  us  into  the  belief  that  in  any  peculiar 
sense  labor  can  be  used  as  a  unit  of  value.  It  is  equally 
valid  and  convenient  to  speak  of  units  of  machinery  and  of 
units  of  land.  In  terms  of  capital  a  factory  site  can  be 
expressed  as  a  multiple  of  a  potato  patch  not  less  perfectly 
than  can  a  sculptor's  labor  as  a  multiple  of  a  ditch-digger's. 

Scarcity  of  things  desired  is  the  one  objective  condition  scarcity 
of  value.     The  things  that  labor  can  produce  and  the  labor  of^r 
to  produce  them  being  scarce,  labor  takes  on  a  value.     All 
things  at  last  become  comparable  in  terms  of  psychic  income 
in  each  individual's  judgment,  but  as  yet  neither  in  this 
comparison  nor  in  the  market  values  that  are  fixed  in  ex- 
change, has  any  absolute  standard  been   found  by  which 
the  utility  of  all  goods  or  the  welfare  of  all  men  can  be 
measured. 


15 


CHAPTER  25 
THE    WAGE    SYSTEM    AND    ITS    RESULTS 

§  I.      SYSTEMS    OF    LABOR 

The  wage  1.  The  wage  system  is  the  organization  of  industry  where- 
defined  ^n  some  men,  owning  and  directing  capital,  buy  at  their  com- 
petitive value  the  services  of  men  without  capital.  The  wage 
system  is  a  method  of  organization  never  found  completely 
realized.  A  community  made  up  entirely  of  independent 
small  farmers,  living  each  on  his  little  patch  of  ground,  does 
not  have  any  essential  feature  of  the  wage  system.  So  long 
as  they  continue  to  be  independent  small  farmers,  owners  of 
small  capital,  self-employing  workers,  the  wage  system  does 
not  exist  in  complete  form.  Some  men  with  capital  in  every 
community  are  working  for  wages,  while  others,  as  inde- 
pendent producers,  are  their  own  employers.  Society  is  not 
sharply  divided  into  two  classes,  one  controlling  all  the 
working  capital,  the  other  quite  without  resources.  The 
wage  system  may  be  spoken  of  as  prevailing  to-day  not  as 
Never  the  the  exclusive,  but  as  the  typical,  or  dominant,  form,  while 
exclusive  sj(je  by  si(je  or  along  with  it  is  found  independent  produc- 
organization  tion.  It  is  clear  that  the  wages  here  spoken  of  are  contract 
wages.  The  wage  system  implies  a  money  contract  between 
employer  and  employed.  The  relation  or  bond  between 
them  is  that  of  a  wage  payment. 

The  wage  system  cannot  be  judged  properly  apart  from 
questions  to  be  later  considered,  such  as  private  property 
and  the  enterpriser's  part  in  industry;  but  some  considera- 
tion of  the  subject  properly  belongs  here.  The  wage  sys- 

226 


§1]  SYSTEMS  OF   LABOR  227 

tern  has  become  of  recent  years  in  America  the  dominant 
form  of  industry.  The  theory  of  wages  is  applied  most 
frequently  in  the  discussion  of  contract  wages,  and  there 
are  certain  practical  relations  between  the  results  of  the 
wage  system  and  the  theory  of  wages. 

2.  The  wage  system,  historically  considered,  is  seen  not  workers 
to  have  displaced  a  system  of  independent  labor.  This  ques-  f^™fnate 
tion  should  be  viewed  in  historical  perspective.  As  far  back  societies 
as  history  can  be  traced,  the  masses  of  workers  have  been 
subordinate.  Civilization  began  with  direction,  with  obedi- 
ence to  superiors  on  the  part  of  the  mass  of  men.  Within 
the  family,  in  the  rudest  tribes,  the  women  and  children 
were  subject  to  the  will  of  the  stronger,  the  head  of  the 
family.  Among  the  Aryan  races  the  family  system  was 
widened,  and  the  patriarch  of  the  tribe  secured  personal 
obedience  and  economic  service  from  all  members  of  the 
community.  Chattel  slavery,  the  typical  form  of  industrial 
organization  in  early  tropical  civilization,  seems  to  have 
been  one  of  the  necessary  steps  to  progress  from  rude  con- 
ditions; students  to-day  incline  to  view  it  as  an  essential 
stage  in  the  history  of  the  race.  But  as  conditions  changed 
with  industrial  development,  chattel  slavery  became  a  hin- 
drance to  progress,  a  disadvantage  to  higher  industry. 

3.     Serfdom  for  rural  labor  and  many  limitations  on  the  piaceofthe 
ivorkman's  freedom  in  the  towns,  were  the  prevailing  condi-  workersin 
tions  in  medieval  Europe.     Serfdom  was  both  a  political  Ages 
and  an  economic  relation.     The  serf  was  bound  to  the  soil ; 
the  lord  could  command  and  control  him;  but  the  serf's  ob- 
ligations were  pretty  well  defined.    He  had  to  give  services, 
but  in  return  for  them  he  got  something  definite  in  the  form 
of  protection  and  the  use  of  land.    Between  the  lord  and  the 
serf  continued  a  lifelong  contract,  which  passed  by  inher- 
itance from  father  to  son,  in  the  case  both  of  the  master  and 
of  the  serf.     In  the  towns  conditions  were  better  for  the 
skilled  workmen,  but  many  things  bore  heavily  on  the  mass 
of  the  workers  shut  out  from  special  privileges.    There  were 


228  THE   WAGE   SYSTEM  AND   ITS  RESULTS  [CH.  25 

strict  rules  of  apprenticeship;  gild  regulations  forbidding 
the  free  choice  of  a  trade  or  a  residence ;  laws  against  immi- 
gration; settlement  laws  making  it  impossible  for  poor  men 
to  remove  from  one  place  to  another ;  arbitrary  regulation  of 
wages,  either  by  the  gilds  in  the  towns  or  by  national  councils 
and  parliaments,  forbidding  the  workmen  to  take  the  com- 
petitive wages  that  economic  conditions  forced  the  employers 
to  pay;  combination  laws  forbidding  laborers  to  combine  in 
their  ©wn  interest.  It  is  not  an  attractive  picture,  but,  as  far 
as  is  possible  in  a  few  words,  it  is  a  truthful  picture  of  the 
conditions  that  existed  before  the  coming  of  the  modern 
system. 

The  wage         4.     Many  continuing  limitations  on  the  freedom  of  tlic 
system  not    worker  are  not  the  results  of  the  waae  system  or  a  part  of 

the  main 

cause  of  it,  but  are  opposed  to  its  complete  workings.  The  worker's 
presenters  jgnorance  js  a  limitation,  preventing  the  choice  of  an  occupa- 
tion for  which  he  might  naturally  be  fitted.  Neglect  of  chil- 
dren by  parents  is  a  limitation,  preventing  industrial 
training  and  the  development  of  qualities  that  would  make 
it  possible  for  the  child  to  excel.  The  faults  of  human 
nature  cannot  be  attributed  to  any  ' '  system  ' ' ;  and  if  they 
are  remediable,  it  is  by  education  and  better  social  oppor- 
tunity. Trade  unions  often  forbid  boys  to  become  appren- 
tices, and  forbid  the  choice  of  a  trade  except  under  conditions 
so  exacting  that  to  many  they  are  impossible.  Such  limita- 
tions are  made  by  the  privileged  few  in  their  own  interest, 
but  they  are  annoying  and  opposed  to  the  interests  of  the 
many,  (j'he  typical  wage  system  would  be  one  in  which  all 
such  hindrances  were  lacking,  in  which  there  were  no  social 
or  political  limitations  on  free  competition  except  such  as 
would  help  in  educating  and  training  the  worker. }  The  wage 
system  should  be  judged  by  what  it  is,  not  by  things  directly 
opposed  to  its  spirit. 


THE  WAGE  SYSTEM  AS  IT  IS  229 


§  II.      THE   WAGE   SYSTEM    AS   IT   IS 

1.  Under  the  wage  contract  the  worker  gets  in  a  definite  Merits  and 
sum  at  once  the  market  value  of  his  services.     Under  the  faultsofthe 

definite 

wage  contract  the  employer  takes  the  risk  as  to  the  future  wage  pay- 
selling  price  of  the  product.  That  he  is  the  one  best  pre-  ment 
pared  to  assume  the  risk  will  be  made  clearer  in  the  dis- 
cussion of  the  employer's  function.  Wage  payment,  there- 
fore, is  a  form  of  insurance  to  the  workingman;  he  gets 
something  definite  instead  of  taking  chances  he  is  ill  pre- 
pared to  take.  Wage  payment  is  a  form  of  credit  to  the 
laborer  whose  labor  has  not  yet  produced  the  distant  grati- 
fication. The  employer  advances  to  the  workman  the  value 
of  the  future  gratification,  discounting  it  at  the  prevailing 
rate  of  interest.  The  darker  side  of  the  wage  bargain  is 
that  the  "cash  nexus,"  as  Carlyle  expressed  it,  is  too  often 
the  only  bond  between  the  parties.  When  the  wages  are  paid, 
the  employer  considers  his  obligations  discharged.  There 
is  a  lack  of  fellowship  and  sympathy  in  it  all.  Work  should 
be  a  bond  of  communion  between  men,  but  as  it  is,  the 
laborers  in  some  great  factories  and  their  employers  live  in 
entirely  different  worlds.  The  great  inequality  of  their  con- 
dition makes  mutual  understanding  difficult.  They  are 
master  and  man,  "boss"  and  hireling,  not  co-workers,  each 
with  a  worthy  part  in  the  noble  tasks  of  industry. 

2.  The  wage-earner  gets   the   competitive  value   of  his  strength 
services,  securing  in  most  cases  much  more   than  a  bare  ^^0^e 
subsistence.     At  the  present  time  competition  is  in  a  large  worker  in 
measure  active  among  employed  as  well  as  among  employ-   Co™!****1011 
ers.     A  believer  in  the  subsistence  theory  of  wages  must, 

under  these  conditions,  expect  wages  to  fall  to  the  starvation 
level.  But  according  to  the  law  of  wages  here  presented,  it  is 
to  be  expected  that  wages  can  and  will  remain  indefinitely 
above  that  level,  falling  or  rising  as  conditions  change.  The 
increase  in  material  wealth  of  itself  tends  to  increase  the 


230  THE  WAGE  SYSTEM  AND  ITS  RESULTS  [CH.  25 

wages  of  the  workman.  The  laborer,  though  without  re- 
sources and  even  though  not  contributing  to  the  increase  of 
capital  by  saving,  thus  shares  in  the  benefit  of  increasing 
capital.  It  is  true  that  under  some  conditions  the  workman 
is  at  a  disadvantage  in  making  the  wage  contract;  labor 
must  be  applied  from  day  to  day  or  it  is  lost,  and  the  laborer 
must  work  to  live.  While  this  does  not  determine  the  rate 
of  wages  in  the  long  run  in  any  occupation  nor  to  any  great 
extent  except  among  the  lowest  grades  of  labor,  it  does  give 
an  advantage  for  the  moment  to  the  employer,  and  enables 
him  to  exercise  at  times  a  harsh  power  over  the  workmen  in 
his  immediate  neighborhood.  A  single  workman  is  thus 
very  often  at  a  disadvantage,  but  it  must  not  be  overlooked 
that  in  a  large  degree  the  competition  for  good  workmen  is 
effective  between  employers  in  different  trades  and  in  distant 
localities. 

3.  Increase  of  efficiency  due  to  the  sacrifice  of  parents 
or  to  personal  exertion,  goes  to  the  individual  worker.  The 
most  essential  practical  feature  in  any  industrial  system 
is  the  appeal  to  the  ambition  of  each  man.  This  appeal 
is  made  where  a  premium  is  placed  on  increasing  efficiency, 
by  insuring  to  it  a  higher  return.  This  result  is  possible 
and  in  large  measure  is  attained  under  the  wage  system. 
Little  less  important  is  the  appeal  to  family  affection  to 
make  possible  by  its  sacrifices  each  worker's  best  preparation. 

An  offsetting  disadvantage  appears  in  the  loss  to  the 
laborer  in  the  decline  of  his  powers.  As  he  gains  in  wages 
if  he  increases  in  efficiency,  so  he  loses  if  his  strength  fails 
from  accident  or  in  the  course  of  years.  This  loss  falls 
upon  him,  not,  as  is  sometimes  said  to  have  been  the  case 
under  serfdom  or  slavery,  upon  his  owner  (as  if  that  se- 
cured to  the  slave  immunity  from  suffering).  It  is  true 
that  in  general  under  the  wage  system  the  worker  has  no 
guarantee  against  loss  of  work  or,  what  is  equally  impor- 
tant, against  sudden  changes  in  industry.  He  may  be,  and 
often  is,  a  victim  of  invention  and  of  changes  in  machinery 


$11]  THE   WAGE   SYSTEM  AS   IT   IS  231 

or  industrial  processes,  by  which  the  masses  of  men  are  the 
gainers. 

4.     Liberty  of  the  worker  in  his  choice  of  work  and  out-  Large 
side  of  working  hours  makes  for  happiness,  character,  and  liberty°f 

.  tn6  Wci£C*~ 

progress.  Opinion  is  almost  a  unit  as  to  the  truth  of  this  worker 
statement.  The  present  wage  system  is  the  freest  condition 
for  the  mass  of  men  that  ever  has  existed.  Their  religious, 
political,  and  personal  convictions,  are  for  the  most  part 
inviolate.  There  is  a  true  but  much  misused  maxim  that 
liberty  has  its  dangers.  Freedom  means  freedom  to  make 
mistakes.  Intelligence  and  strong  industrial  virtues  are  re- 
quired to  exercise  properly  a  freedom  newly  acquired.  Thus 
it  is  the  lowest  class  of  labor  that  reaps  the  smallest  advan- 
tage from  free  conditions,  and  that  suffers  most  from  their 
misuse. 

The  main  evil  in  the  wage  system  is  certainly  not  that  Limits  to 
the  liberty  of  the  worker  is  too  great,  but  that  it  is  too  small.  ^g^ 
The  sale  of  labor  involves  the  obeying  of  orders  during 
certain  hours  specified  in  the  contract.  Here  again  the  evil 
is  greatest  in  the  lowest  grades  of  work,  while  the  great 
majority  of  wage-earners  are  left  a  large  measure  of  choice 
in  the  time  and  manner  of  their  work.  Where  labor  is 
severe  and  without  joy  to  the  worker,  it  appears  to  be  little 
better  than  a  form  of  slavery.  Contrast  the  condition  of  the 
section  hand,  cursed  and  beaten  by  a  brutal  foreman,  with 
that  of  the  wage-earner  in  the  locomotive-cab,  self-respecting, 
self -directing,  and  trusted  with  the  safety  of  property  and 
lives.  The  wage  system  is  manifold,  it  is  adaptable.  If  it 
holds  a  portion  of  the  laborers  with  a  harsh  hand,  it  gives  to 
all  a  wide  measure  of  opportunity,  and  to  most  a  great  degree 
of  independence  in  their  lives.  A  hasty  resort  to  indiscrim- 
inating  analogy,  as  in  calling  wage-work  "slavery,"  does 
not  further  truth  or  social  justice. 


232 


THE   WAGE   SYSTEM  AND  ITS   RESULTS 


[CH.  25 


The  rise  of 

money 

wages 


§  III.      PROGRESS  OF  THE   MASSES  UNDER  THE   WAGE   SYSTEM 

1.  The  nineteenth  century  was  a  period  of  great  progress 
for  the  masses  in  America,  England,  and  throughout  Europe. 
There  are  differences  of  opinion  as  to  the  extent  of  this 
progress,  the  way  in  which  it  is  to  be  measured,  and  the 
degree  to  which  it  is  an  occasion  for  congratulation.     There 
is  no  longer  any  dispute  as  to  the  actual  fact  that  it  has 
taken  place.     Many  lines  of  evidence  converge  to  confirm 
this  one  conclusion.    The  average  money  wages  in  the  United 
States  may  be  represented  in  1840  by  87.7,  in  1860  by  100, 
and  in  1891  by  161.2.     This  was  the  high  mark  for  a  time 
and  a  decline  followed.     Again  wages  rose  from  1897  on, 
and  in  1899  had  reached  163.2.    They  have  continued  to  rise 
since  and  in  1903  attained  the  highest  point  in  the  history 
of  our  country  and  therefore  in  the  history  of  the  world. 
Another  temporary  decline  undoubtedly  will  occur  when  in- 
dustrial conditions  become  less  prosperous. 

Real  wages,  also,  the  power  to  purchase  goods  with  labor, 
are  greater  than  ever  before  so  far  as  this  can  be  measured 
in  the  price  of  leading  commodities.  The  offsetting  loss  of 
the  free  health-giving  pleasures  of  country  life  cannot 
easily  be  expressed.  In  England  likewise  the  rise  in  money 
wages  has  been  great.  In  1860  it  is  represented  by  100,  in 
1870  by  113,  in  1880  by  125,  in  1891  by  140,  in  the  intervals 
some  decline  occurring.  For  a  century  in  all  civilized  lands 
wages  have  moved  in  an  ever-rising  series  of  waves.  The 
purchasing  power  of  wages  in  England  increased  ninety 
per  cent,  in  the  thirty  years  between  1860  and  1891. 
Throughout  Europe  the  same  general  change  is  seen,  going 
always  hand  in  hand  with  new  industrial  methods  and  the 
displacing  of  the  old  agricultural  system  by  the  wage  sys- 
tem. As  the  hours  of  labor  have  at  the  same  time  been 
shortened,  the  workers  have  gained  doubly. 

2.  This  progress  is  mainly  due  to  the  opening  up  of  rich 


§111]  PROGRESS   UNDER  THE   WAGE  SYSTEM  233 

natural  resources  and  to  the  development  of  industrial  pro-  Need  of  a 
cesses.    Recognized  in  some  measure  by  every  one,  this  prog-  broad  ex~ 
ress  is  attributed  by  different  observers  to  different  causes :   Ling  °] 
in  America,  by  many  to  the  protective  tariff;  in  England,   wages 
by  many  to  the  freer  trade  introduced  about  1840 ;  through- 
out the  continent  of  Europe,  to  the  spread  of  constitutional 
government   and   free   institutions;   by  trade-unions  every- 
where, to  the  organization  of  labor.  There  is,  doubtless,  under 
certain  conditions,  some  portion  of  truth  in  each  of  these 
claims.    But,  either  separately  or  altogether,  they  fall  short 
<of  a  broad,  reasonable,  and  sufficient  explanation.    The  two- 
fold proposition  just  presented,  the  justification  for  which 
has  been  given  in  preceding  chapters,  points  to  a  general 
and  adequate  cause. 

Seventy-five  years  ago  it  was  thought  that,  with  the  in-  The  gloomy 
crease  of  machinery,  of  factories,  of  the  concentrated  con-  JJe^wfe? 
trol  of  wealth,  and  especially  with  the  wage  system,  there  system  was 
must  go  a  steady  depression  in  the  welfare  of  the  working-  mistaken 
man.     This  idea  was  connected  with  the  iron  law  of  wages. 
It  was  believed  by  some  that,  whatever  the  causes  of  advan- 
cing social  income  might  be,  the  wage  system  would  rob  the 
wage-earners  of  all  share  in  progress.    In  view  of  the  facts, 
if  it  cannot  now  be  asserted  positively  that  the  wage  system 
is  the  cause  of  all  the  gain,  it  can  be  asserted  negatively  that 
it  is  not  inconsistent  with  great  progress  on  the  part  of  the 
laboring  classes.     It  might  be  possible  to  go  further  and  to 
maintain  that  the  organization  of  industry,  under  the  wage 
system   and   competitive   conditions,   by   its   encouragement 
of  enterprise,  energy,  and  economy,  has  been  an  indispen- 
sable condition  in  the  industrial  progress  which  has  in  turn 
made  possible  the  rising  wages  of  labor. 

3.     The  increased  proportion  of  workers  in  the  higher  Morework- 
occupations  means  a  further  rise  in  the  average  condition  *™™™™ 
of  the  masses.    A  smaller  proportion  of  workers  is  now  en-  callings 
gaged  in  the  low-paid  industries  than  fifty  years  ago,  and  a 
correspondingly  larger  proportion  is  in  the  better,  or  highly 


234 


THE  WAGE  SYSTEM  AND  ITS  RESULTS 


[CH.  25 


The  masses 
gain  by 
general 
social 
advance 


Better 
social  con- 
ditions must 
grow  out  of 
the  wage 
system 


paid,  industries.  Decade  by  decade  the  proportion  shifts 
toward  the  upper  part  of  the  scale.  Both  in  America  and 
in  England  (doubtless  also  in  other  countries)  more  men 
are  now  engaged  in  the  higher  professions  and  skilled  oc- 
cupations, a  smaller  proportion  in  the  lower  occupations. 
This  would  raise  the  average  of  wages  even  if  the  wages  of 
particular  occupations  had  not  risen. 

4.  The  diffused  advantages  of  progress  mean  relatively 
more  to  the  masses  than  to  the  rich.  In  the  olden  days  the 
poor  man  was  bound  to  the  spot  where  he  lived,  the  rich  man 
had  his  carriage ;  to-day  poor  and  rich  ride  side  by  side 
in  the  trolley  car.  The  introduction  of  these  cheap  methods 
of  enjoyment  means  relatively  more  to  the  poor.  Better 
medical  care,  better  sanitation,  more  abundant  food,  cloth- 
ing, comfort,  free  schools,  and  libraries  have  all  a  part  in 
this  movement.  The  enormous  possibilities  in  these  lines  are 
just  beginning  to  be  realized.  The  achievements  of  the  last 
twenty  years  read  like  a  story  from  fairy-land.  It  tells  the 
leveling  up  of  the  conditions  enjoyed  by  the  common  man. 

/  5.  Any  sound  method  of  improving  social  conditions  must 
grow  out  of  experience,  not  break  with  it.  Even  if  things 
were  on  the  downward  instead  of  the  upward  road  there 
would  be  no  excuse  for  wild  speculation.  The  only  rational 

\  way  is  to  find  what  is  good  in  what  is,  and  build  upon  it. 

\There  can  be  no  excuse  for  suggesting  a  method  from 
imagination.  Projects  of  social  change  must  be  tried  by 
successful  experiment,  and  gradually  fitted  to  present  needs. 
It  is  in  this  way  that  the  higher  forms  of  life  have  devel- 
oped; it  is  in  this  way  that  social  and  political  institutions 
have  come  into  being.  Things  that  work  successfully  first 
in  a  small  way  are  worthy  of  trial  on  a  larger  scale.  The 
wage  system  is  a  favorite  object  of  attack  for  radical  social 
reformers.  It  has  many  unlovely  features  and  there  are 
many  individual  cases  of  hardship.  It  may  well  be  asked, 
What  method  shall  be  pursued  to  reform  it?  Its  retention, 
however,  is  not  inconsistent  with  very  great  changes  in  the 


§111]  PROGRESS   UNDER   THE   WAGE   SYSTEM  235 

present  political  and  economic  arrangements.  The  imper- 
sonal economic  forces  are  working  for  improvement;  but 
further,  there  is  a  growth  of  sentiment,  an  increase  in  sym- 
pathy, a  feeling  among  men  that  the  "cash  nexus"  is  not  the  improve- 
only  bond  that  should  unite  different  classes,  and  this 
sympathy  is  becoming  an  economic  force,  softening  and 
improving  many  of  the  most  unlovely  features  of  the  modern 
wage  system. 


CHAPTER  26 
MACHINERY  AND  LABOR 

§  I.      EXTENT  OF  THE  USE  OF  MACHINERY 

1.  A  machine  is  a  mechanical  device  by  which  power  is 
applied  in  an  automatically  repeated  manner,  to  change  the 
place  or  form  of  things.  It  is  not  easy,  perhaps  not  im- 
portant, to  distinguish  the  machine  from  the  tool  in  every 
case.  Tools  are  portions  of  matter,  such  as  bone,  wood,  iron, 
which  man  guides  and  directs  in  applying  his  energy  to 
things.  A  machine  may  be  used  by  the  foot,  but  the  hand  is 
the  great  tool-using  member.  In  many  cases  there  is  a  clearly 
marked  distinction  between  tool  and  machine.  A  simple, 
single  piece  that  can  be  taken  into  the  hand,  as  a  spade,  a 
hammer,  a  knife,  is  a  tool ;  a  combination  of  wheels,  levers, 
pulleys,  etc.,  is  a  machine.  The  simplest  machine  is  but  a 
slight  adaptation  of  the  tool,  by  which  power  may  be  applied 
in  an  automatically  repeated  manner.  The  drag  develops 
into  the  cart,  a  simple  machine.  The  spinning-stick,  a  tool 
used  in  ancient  times,  developed  into  the  Saxon  spinning- 
wheel  of  the  sixteenth  century,  the  form  used  when  America 
was  colonized.  The  use  of  power  derived  from  nature,  as 
that  of  wind  and  water  and  steam,  while  not  the  essential 
mark  of  machines,  is  the  most  characteristic  feature  of  their 
modern  development.  Hand-machines,  such  as  the  hand- 
press  and  the  typewriter,  have  had  important  industrial  re- 
sults, but  it  is  the  use  of  power  leading  to  the,  concentration 
of  industry  and  the  ownership  of  machinery  by  the  employ- 
ers that  has  the  greatest  significance  in  the  modern  economic 
problem. 

236 


§1]  EXTENT  OF  THE  USE  OF  MACHINERY  237 

2.  Machinery  of  many  sorts  has  long  been  used,  but  the  Machinery 
"age  of  machinery"   begins  with  the  eighteenth  century.  ^^^ 
Inventions,  new  machines,  and  new  processes,  though  not  trial  revoiu- 
f  requent,  were  not  unknown  in  the  Middle  Ages ;  but  no  one 

class  of  machines  took  possession  of  a  whole  field  of  industry 
and  gave  rise  to  a  great  economic  problem  by  the  displacing 
of  labor.  The  great  industrial  changes  in  the  Middle  Ages 
generally  grew  out  of  political  changes,  or  of  changes  of 
routes  of  trade  whereby  large  industries  were  disturbed,  or  of 
changes  in  the  use  of  land  through  new  methods  and  the 
bringing  into  use  of  land  in  other  places.  The  industrial 
changes  in  England  at  the  end  of  the  eighteenth  century 
on  the  contrary  were  due  mainly  to  great  mechanical 
inventions.  The  development  of  the  textile  machines 
for  cotton  and  wool  spinning  and  weaving  mark  the  begin- 
ning of  the  movement.  Here  for  the  first  time  were  inven- 
tions in  such  numbers,  of  such  a  nature,  and  under  such 
conditions,  that  they  were  rapidly  and  widely  applied,  af- 
fecting the  lives  of  a  great  number  of  workers.  The  steam- 
engine  at  the  same  time  opened  up  the  long  line  of  mechan- 
ical inventions  by  which  wood  and  iron  are  shaped  and 
wrought,  and  the  iron  industry  underwent  notable  develop- 
ments. Since  that  time,  have  taken  place  in  all  Western 
countries  that  rapid  expansion  in  the  use  of  machines  and 
those  notable  changes  in  industrial  organization  which  dis- 
tinguish our  era  from  all  others. 

3.  Machinery  is  applicable  in  very  different  degrees  to  increased 
the  different  processes  and  industries.    Machinery  can  save 
much  labor  in  some  directions,  little  or  none  in  others.    It  is 
especially   adapted   to   the   application   of   power.     In  the 
United  States,  in  1870,  in  manufactures  alone,  two  and  one 

third  million  horse-power  were  used ;  in  1900,  eleven  and  one 
third  million,  the  increase  being  five-fold.  It  is  said  that  in 
the  world,  in  1870,  three  and  one  half  million  horse-power 
was  furnished  by  stationary  engines,  ten  millions  by  locomo- 
tives. Probably  to-day  the  total  is  four-fold  as  great. 


238 


MACHINERY  AND  LABOR 


[CH.  26 


Machinery  is  applicable  with  especial  advantage  to  indus- 
tries that  change  the  form  of  materials  easily  transported 
and  widely  used.  There  must  be  a  large  output  to  justify 
the  use  of  machinery.  In  1840  a  man's  work  in  spinning 
cotton  was  three  hundred  and  twenty  times  as  effective  as  in 
1769,  in  1855  it  was  seven  hundred  times;  and  though  the 
rate  of  improvement  is  diminishing,  to-day  the  productivity 
of  such  labor  is  still  greater.  Similar  examples  are  found  in 
the  manufacture  of  shoes,  and  in  all  varieties  of  wood-  and 
iron-work.  Machinery  is  most  applicable  where  there  is  a 
compact  plant ;  not  so  easily  where  the  power  has  to  be  dis- 
tributed over  a  wide  area,  unless  a  special  track  can  be  pro- 
vided. 

Machinery,  therefore,  has  affected  manufactures  much 
more  immediately  and  greatly  than  it  has  agriculture.  It 
has  not  as  yet,  for  example,  been  found  practicable  to  apply 
steam  to  ploughing  to  any  great  extent.  As  the  profitable 
use  of  most  farm  machinery  requires  a  level  surface  and  a 
large  area  given  to  a  single  crop,  it  cannot  be  used  as  well 
east  of  the  Alleghany  Mountains  as  in  the  Mississippi  Valley, 
and  it  is  still  uneconomical  in  large  portions  of  the  civilized 
world.  Despite  this  difficulty  the  methods  of  the  farmer  of 
to-day  contrast  strongly  with  those  of  one  hundred  or  fifty 
years  ago.  Planters  and  seeders,  reapers,  harvesters,  corn- 
shellers,  hay-loaders,  automatic  unloading-forks,  elevators, 
water-power-,  steam-,  and  gasoline-engines  allow  great  econ- 
omies. The  labor  needed  to  produce  food  for  one  hundred 
people  is  a  fraction  of  what  it  was  one  hundred  years  ago. 
In  many  other  industries  machines  are  usable  only  in  a 
slight  measure,  indirectly,  or  not  at  all.  They  are  of  the 
least  assistance  in  the  personal  services,  and  in  the  work  of 
the  thinker,  the  teacher,  the  speaker,  and  the  artist. 


§11]  EFFECT   OF   MACHINERY   ON   WAGES  239 

§  II.      EFFECT  OF  MACHINERY  ON  THE  WELFARE  AND  WAGES  OF 

THE  MASSES 

1.     The  immediate  effect  of  improved  machinery,  if  sud-  EVU  ofsud- 
denly  introduced,  is  almost  always  to  throw  some  men  out  denintr°- 

•  duction  of 

of  employment.  Any  sudden  change  in  industry  injures  men  machinery 
who  have  become  adapted  to  the  work  that  is  affected.  A 
well-mastered  trade,  a  wage-earning  though  intangible  posses- 
sion, may  be  made  suddenly  valueless.  Men  cannot  quickly 
change  their  methods  of  working  or  their  place  of  work. 
This  is  as  true  of  change  brought  about  by  new  trade  routes 
or  by  scientific  discoveries  (where  machinery  does  not  enter 
in)  as  in  the  case  of  labor-saving  machines.  If  machines 
displace  labor  rapidly,  men  who  cannot  adjust  themselves 
to  the  new  conditions  suffer,  and  there  are  always  some  who 
cannot  adjust  themselves,  always  some  who  suffer.  It  is 
rarely  possible  for  a  man  past  middle  life  to  shift  over  into 
a  new  trade  where  his  efficiency  will  be  as  great  and  his  pay 
as  high  as  in  the  old.  New  methods  of  puddling  iron  sent 
many  old  men  into  the  poorhouses  of  Pennsylvania  only  a 
few  years  ago.  Even  where  the  total  employment  increases, 
the  individual  sometimes  suffers.  The  increased  demand 
resulting  from  the  cheapening  of  a  product  may  call  for 
more  workers  than  were  employed  before  the  new  machinery 
came  in,  and  yet  some  of  the  former  workmen  may  be  thrown 
out  of  employment.  The  introduction  of  the  linotype  is  said 
to  have  displaced  a  large  number  of  hand  type-setters,  but  to 
have  increased  greatly  the  amount  of  printing.  As  the 
machines  are  expensive  and  cannot  be  worked  properly  by 
men  not  highly  expert,  men  past  thirty-five  years  of  age 
have  not  been  allowed  to  learn  their  use. 

The  least  efficient  men  in  any  trade  always  suffer  most.   LOSS  fails  on 
The  change  crushes  hardest  the  man  at  the  margin  of  em-  ^Sc^ 
ployment.     The  more  skilled  workman  can  hasten  his  pace  workers 
and  still  earn  a  living  wage  in  competition  with  a  machine, 


240 


MACHINEEY  AND  LABOR 


[OH.  26 


Error  of  the 
' '  lump  of 
labor ' ' 
notion 


Effect  of 
machinery 
varies  in 
different 
industries 


while  the  less  skilled  can  but  drop  out  entirely,  innocent 
victims  of  an  economic  change,  sacrifices  to  the  cause  of 
industrial  progress.  Happily  such  pathetic  incidents  are 
relatively  not  numerous.  Most  machinery  is  introduced  in 
commercial  centers,  and  gradually  spreads  to  other  factories 
in  such  a  way  that  most  men  can  adapt  themselves  to  the 
change.  The  effect  of  machinery  must  not  be  judged  by  the 
extreme  cases.  It  was  found  that  there  were  more  hand- 
looms  in  use  in  England  in  1850  than  fifty  years  before, 
though  in  the  meantime  power-looms  had  displaced  the  hand- 
looms  in  all  the  great  factories. 

2.  After  time  for  adjustment,  the  total  sum  of  employ- 
ment is  as  great  as  before,  but  the  labor  is  differently  dis- 
tributed. The  "  lump  of  labor  "  idea,  as  it  is  called,  is 
widely  held,  especially  among  workingmen.  The  notion  is 
that  there  is  exactly  so  much  labor  predetermined  to  be  done ; 
therefore,  if  machines  are  introduced,  there  is  that  much  less 
for  men  to  do.  The  logical  conclusion  easily  drawn  is  that 
every  machine  reduces  wages.  Few,  however,  would  go  on 
to  the  further  conclusion  that  in  the  aggregate  the  existing 
machinery,  like  an  enormous  vampire,  is  sucking  the  life- 
blood  of  the  working-people,— though  traces  of  such  a  notion 
frequently  appear. 

If  extreme  examples  are  taken,  it  may  be  made  to  appear 
either  that  an  increase  or  that^a  decrease  of  employment 
results  from  machinery.  Industries  grade  off  from  those 
that  are  capable  of  developing  a  greater  and  greater  demand, 
to  those  at  the  other  extreme  that  are  capable  of  a  very 
slight  increase,  as  a  result  of  a  lowering  of  the  price.  There 
seems  to  be  practically  no  limit  to  the  consumption  of  textiles, 
provided  their  price  falls;  the  demand  for  dress  alone  is 
indefinitely  expansible.  Queen  Elizabeth,  who  had  a  differ- 
ent dress  for  every  day  in  the  year,  has  many  potential 
imitators.  There  is  a  constant  increase  relatively,  as  well  as 
absolutely,  in  the  number  employed  in  transportation,  as 
each  census  shows;  there  are  more  railroad  men  relatively 


$ll]  EFFECT  OF  MACHINERY  ON  WAGES  241 

than  there  were  stage-drivers  and  teamsters  before  the  day 
of  railroads.  The  number  of  people  now  engaged  in  printing 
books  and  papers  is  larger  by  far  than  in  the  days  when  all 
the  books  of  the  world  were  written  by  the  old  monks  in  their 
cloisters.  The  proportion  of  workers  in  agriculture,  on  the 
other  hand,  is  less  than  it  formerly  was.  In  part  this  is  a 
change  in  appearance  only,  for  the  farmer  once  made  a 
large  part  of  his  tools  which  are  now  made  by  workers 
employed  in  manufactures,  yet  who  in  a  very  real  way  are 
aiding  in  agriculture.  In  part  the  change  is,  however,  the 
effect  of  the  use  of  machinery  and  other  improvements  in 
agricultural  processes.  The  amount  of  raw-food  products 
required  for  each  hundred  persons  is  quite  inelastic.  As  it 
becomes  possible  to  expend  more  for  food,  the  change  is  made 
in  quality,  variety,  flavor,  rather  than  in  quantity.  The 
greater  part  of  the  saving  in  the  cost  of  food  is,  however, 
expended  in  other  products,  and  the  labor  saved  in  agricul- 
ture finds  employment  in  supplying  these  rising  wants.  In 
other  cases  also,  new  industries  are  made  possible  as  ma- 
chines liberate  energy  from  the  production  of  the  more 
necessary  goods.  At  each  census  it  is  necessary  to  change 
the  schedule  of  occupations,  because  men  have  adopted  call- 
ings unknown  before. 

3.     In  some  cases  the  introduction  of  new  machines  in-  Abnormal 
jures  particular  workmen.     The  only  reason  for  the  use  of   newmacw- 
machinery  is  to  improve  the  quality  or  to  lower  the  price  of  neryin 
products.    If  the  workers  can  do  nothing  but  blindly  pursue  Englan 
the  same  tasks,  it  is  to  be  expected  that  the  wages  of  hand- 
labor  will  fall  in  a  particular  trade  into  which  machinery  is 
suddenly  introduced.     When,   as   sometimes  happens,   em- 
ployers introduce  machines  for  the  immediate  purpose  of 
breaking  a  strike,  the  workmen  are  convinced  that  machinery 
is  the  enemy  of  labor. 

Because  the  extensive  introduction  of  machinery  in  Eng- 
land was  at  first  accompanied  by  the  unhappy  result  of  a 
lengthening  of  the  hours  of  labor  in  factories,  this  result 

16 


242  MACHINERY  AND  LABOR  [OH.  26 

was  deemed  to  be  necessary  in  all  other  cases.  It  was  in  fact 
quite  abnormal,  and  has  not  been  seen  elsewhere.  The  own- 
ers of  factories  wished  to  keep  their  machines  employed  as 
many  hours  as  possible;  the  laboring  classes  of  England, 
being  at  the  same  time  demoralized  and  depressed  by  indus- 
trial and  social  influences  that  had  no  logical  connection  with 
machinery,  had  no  power  to  resist  this  movement.  In  all 
other  countries  of  Europe  and  in  America,  where  the  in- 
troduction of  machinery  has  been  more  gradual  and  normal, 
it  has  been  followed  immediately  by  a  shortening  of  working 
hours,  as  eventually  it  was  in  England  also. 

Higher  4.     Indeed,  the  economic  effect  of  improved  appliances  is 

caii^resuTt"  ^/05fica^2/  and  inevitably  to  raise  wages.  It  has  been  shown 
from  the  use  above,  in  the  discussion  of  wages,  that  if  the  efficiency  of 
ofmachi-  machines  increases  faster  than  does  the  number  of  workers 

nery 

who  use  them,  the  marginal  application  of  labor  stops  at  the 
higher  uses  or  services  of  agents  and  is  not  forced  to  the 
lower.  The  more  perfect  the  economic  environment,  the 
higher  the  incomes  even  of  those  who  own  no  part  of  the 
machinery.  A  part  of  this  benefit  may  appear  in  the  form 
of  higher  money  wages  received,  a  part  in  the  form  of  the 
lower  price  of  things  bought.  Real  wages  are  the  essential 
thing,  and  as  a  consumer  the  laborer  shares  with  every  other 
member  of  society  in  the  benefits  of  improved  machinery. 
The  benefits  resulting  from  greater  abundance  are  diffused, 
and  as  goods  are  brought  from  the  high,  or  scarcity,  end  of 
the  scale  of  value  down  toward  the  level  of  free  goods,  every- 
body gains  by  the  abundance  and  cheapness. 

some  grades  The  general,  or  average,  gain  is  not  to  be  judged  by  com- 
than Others  Parin£  the  conditions  of  the  lowest  grade  of  society  with  those 
of  fifty  years  ago,  for  while  that  grade  may  have  been  bet- 
tered only  a  little,  it  has  been  possible  for  large  numbers  to 
rise  to  higher  grades  because  of  the  use  of  machinery.  The 
physical  tasks  are  to-day  much  lighter  than  ever  before,  and 
a  larger  proportion  of  society  is  engaged  in  industries  that 
require  skill  and  thought  rather  than  physical  labor.  That 


§11]  EFFECT  OF  MACHINERY  ON  WAGES  243 

portion  of  the  work  is  being  more  and  more  shifted  upon 
machines.  It  is  important,  though,  to  distinguish  between 
classes  of  workers  in  judging  of  the  benefits  and  evils  of 
machines.  A  machine  is  "an  iron  man,"  it  has  been  said, 
and  comes  into  competition  with  other  men  to  lower  their 
wages  by  outworking  and  underbidding  them.  But  this  iron 
man  can  do  only  automatic  tasks;  it  is  not  capable  of  exer- 
cising judgment.  Every  intelligent  laborer  who  can  adjust, 
adapt,  fit  himself  for  more  intelligent  action  will  rise  above 
the  machine  and  profit  by  its  presence.  (But  the  crude 
physical  labor  which  can  compete  only  on  the  plane  of^ 
automatic  machines,  must  find  its  field  of  employment  more  , 
and  more  hedged  in.JIf  the  wages  of  unskilled  labor  are  not  / 
depressed,  it  is  because  of  the  enterprise  of  others  who  rise; 
to  more  skilled  employments  and  thus  reduce  the  competitors 
of  the  lowest  rank. 

5.  The  early  effects  of  the  factory  system  on  the  health,  The  growth 
intelligence,  and  morals  of  the  workers  often  have  been  bad;  of  facton< 
but  not  necessarily  the  abiding  effects.  Some  kinds  of  ma- 
chines can  be  more  profitably  used  when  they  are  grouped  in 
great  factories,  and,  where  this  is  common,  it  is  spoken  of  as 
the  factory  system.  In  the  ideal  modern  factory  (realized  in 
few  cases)  each  smaller  machine  is  a  part  of  a  larger  organi- 
zation of  machinery,  so  perfect  that  the  material  goes  in  at 
one  end  of  the  building  and  out  at  the  other  without  the 
loss  of  a  single  motion.  Factories  compel  great  numbers  of 
laborers  to  live  near  each  other  and  to  work  together.  The 
sudden  crowding  together  of  people  into  new  social  relations 
is  usually  bad  for  morals.  Men  are  moral  under  the  eyes 
of  their  neighbors,  acquaintances,  and  families;  habits  be- 
come adjusted  to  right  standards,  and  the  temptations  in  new 
conditions  are  always  great.  Until  of  late,  engineering 
science  has  not  been  able  to  deal  with  the  problems  that 
arise  where  population  is  densely  crowded,  and  the  early 
factories  with  their  surroundings  were  most  unsanitary. 
Under  the  degrading  conditions  that  resulted  in  some  places, 


244  MACHINERY  AND  LABOR  [CH.  26 

especially  in  England,  the  effect  of  machinery  on  the  intelli- 
gence of  the  workers  was  bad.  Whether  this  is  its  natural 
result  is  debatable,  but  the  factory  worker  in  general  does 
not  appear  to  be  less  intelligent  than  the  agricultural  worker. 
The  alertness  of  the  city  dweller  is  due  doubtless  to  social  con- 
tact more  than  to  the  immediate  work  he  does.  This  work 
may  or  may  not  be  less  thought-awakening  than  work  with 
simple  tools.  There  is  a  general  improvement  along  all  the 
lines  of  intelligence,  morals,  and  health.  The  conditions  in 
the  cities  as  regards  health  and  morals  are  approaching  those 
of  agricultural  communities.  While  many  factory  districts 
are  forlorn,  there  may  be  seen  around  many  factories  more 
happy  conditions,  better  buildings,  better  sanitation,  in- 
creased leisure  for  workers,  workmen's  clubs,  educational 
agencies,  and  many  other  evidences  of  civic  and  social 
progress. 

6.  The  great  social  consequences  flowing  from  the  con- 
centration of  industry  and  wealth  are  the  most  serious  prob- 
lems in  the  relation  of  machinery  to  labor.  The  ownership 
of  tools  was  widely  diffused  in  medieval  times.  It  is  not  yet 
evident  how  many  can  own  a  share  in  great  factories,  but 
the  control  drifts  into  few  hands.  It  is  not  yet  clear  what 
social  effects  great  corporations  will  have  on  our  democratic 
institutions.  Many  problems  of  large  industry  remain  to  be 
solved  in  the  near  future.  The  question  in  the  old  form,  as 
to  the  effect  of  machinery  on  labor,  is  no  longer  open.  It 
has  been  clearly  answered  by  experience  and  explained 
by  theory:  the  economic  effect  of  machinery  is  to  lift  the 
productiveness  and  efficiency  of  the  average  man.  The 
benefits  are  unequally  distributed,  but  nearly  all  share  in 
them  to  some  degree.  The  question  which  the  future  will 
have  to  answer  is,  What  will  be  the  social  and  political  effects 
of  the  great  fortunes  that  have  been  made  possible  by  the 
enormous  development  of  machinery? 


CHAPTER  27 
TRADE-UNIONS 

§  I.      THE   OBJECTS   OF   TRADE-UNIONS 

1.     A  trade-union  is  an  association  of  wage-workers  for  \  Definition 
purposes  of  mutual  information,  mutual  help,  and  for  the\ 
raising  of  wages.    The  term  trade-union  is  used  in  a  general/  unions 
sense  both  of  combinations  of  workers  in  the  same  trade,  and 
of  men  in  different  trades,  though  usually  the  latter  are 
called  labor-unions.     The  "  Knights  of  Labor  "  is  a  good 
example  of  the  labor-union,  the  "American  Federation  of 
Labor  "  of  a  combination  of  trade-unions.     The  Knights  of 
Labor  is  composed  of  local  branches  to  which  workers  of 
every  class  except  lawyers  and  saloon-keepers  are  admitted. 
The  Federation  of  Labor,  however,  is  composed  of  chapters, 
or  lodges,  that  are  homogeneous,  all  the  men  of  each  lodge 
being  in  the  same  trade. 

The  definition  given  is  broad  enough  to  include  the  various 
degrees  of  help  given  and  the  various  methods  adopted  by 
trade-unions  to  accomplish  their  objects.  Trade-unions  are 
mutual-benefit  associations:  insurance  against  accident, 
sickness,  death,  or  lack  of  employment,  forms  an  important 
part,  and  in  some  cases  almost  the  whole  of  their  work. 
All  unions  in  a  measure  serve  their  members  as  employ- 
ment bureaus,  while  in  some  unions  this  is  a  most  important 
feature.  Through  trade-papers,  correspondence,  and  per- 
sonal meetings,  information  is  exchanged  regarding  trade 
conditions,  and  great  mutual  service  is  thus  rendered.  But 
a  great  deal  of  the  help  given  is  in  the  more  impersonal  eco- 

245 


246 


TRADE-UNIONS 


[CH.  27 


nomic  ways :  help  to  get  from  the  employers  better  wages,  to 
secure  shorter  hours,  to  improve  in  various  ways  the  condi- 
tions of  employment. 

I  2.  The  organization  of  workers  has  resulted  from  the 
\separation  of  the  economic  and  personal  interests  of  em- 
ployers and  workmen.  The  control  of  industry  has  become 
more  concentrated  during  the  age  of  machinery,  and  this  has 
reduced  the  feeling  of  economic  unity  among  the  different 
ranks  of  industry.  There  is  now  to  the  average  workman 
no  possibility  of  becoming  a  master,  an  employer.  The 
largeness  of  industry  forbids,  moreover,  the  meeting  and 
personal  acquaintance  of  employer  and  workman  which  were 
before  possible.  Misunderstandings  grow  when  men  cannot 
talk  over  their  differences.  The  social  chasm  has  widened 
between  the  workmen  and  the  responsible  director  of  in- 
dustry. As  a  result  of  these  changes,  the  attitude  of  the 
employer  very  often  has  become  that  of  the  buyer  of  labor 
as  a  mere  ware.  He  has  with  the  mass  of  his  employees  no 
personal  relations  whatever.  Under  these  conditions,  when 
the  employer  feels  the  presence  of  competition,  he  is  more 
likely  to  force  the  lowest  wage  that  is  possible.  It  is  not 
unusual  for  the  immediate  direction  of  factories  to  be  in- 
trusted to  paid  managers,  who  are  responsible  to  the  stock- 
holders and  whose  work  is  judged  only  by  the  dividends  they 
succeed  in  earning.  Many  examples  might  be  found  where 
the  managers  or  the  resident  owners  have  wished  to  pur- 
sue a  more  liberal  policy  than  the  absentee  shareholders 
would  permit. 

3.  The  need  of  organization  of  labor  has  grown  with  the 
growth  of  factories  and  with  the  loss  of  personal  touch 
among  the  workers.  This  is  another  aspect  of  the  point  just 
mentioned.  The  smaller  the  number  of  employers,  the  easier 
is  it  by  an  understanding  to  suppress  competition  on  their 
side.  If  there  is  only  one  factory  of  a  kind  in  a  town  or 
city,  the  employer  is  able  to  drive  a  harder  bargain  with  the 
worker.  Especially  in  times  of  industrial  depression  is  a 


5 1]  THE   OBJECTS   OF   TRADE-UNIONS  247 

change  of  employment  difficult  for  the  laborer;  it  involves 
much  risk,  and  loss  of  time  and  money  in  moving.  In  the] 
long  run  competition  must  be  felt  even  in  such  cases.  The 
unfair  employer  will  find  his  workmen  drifting  away,  his 
force  reduced  in  number  and  quality,  and  his  evil  reputation 
going  abroad  among  workmen.  But  there  is  a  great  deal  of 
friction  in  this  adjustment  and  the  loss  falls  largely  upon 
the  workman.  In  a  large  industry,  especially,  the  workers 
have  no  personal  acquaintance  with  each  other,  nothing  to 
give  them  a  sense  of  unity  and  power.  In  the  old-fashioned 
shop,  with  its  close  association  and  its  interchange  of  views, 
could  grow  up  a  strong  public  opinion ;  but  in  the  wilderness 
of  a  modern  factory  the  worker  may  be  unknown  in  name 
and  character  to  the  man  who  touches  elbows  with  him. 
Moreover,  in  America  differences  in  nationality  and  in 
speech  among  immigrant  workers  is  often  an  effective  factor 
in  preventing  the  assertion  of  their  interests.  There  is  an 
analogy  (though  it  is  only  an  analogy)  between  these  condi- 
tions and  the  political  conditions  that  have  led  pure  democ- 
racies to  give  way  to  representative  governments.  So  long 
as  a  community  is  small  and  men  know  each  other  personally, 
there  may  be  popular  government,  but  when  the  number 
becomes  larger  the  only  way  in  which  public  opinion  can  be 
concentrated  and  made  effective  is  by  delegating  the  func- 
tions of  government  to  representatives. 

4.  The  main  objects  of  labor-unions  to-day  are  to  im- 
prove conditions  in  their  working  places,  to  maintain  or  in- 
crease wages,  and  to  shorten  working  hours.  Better  condi- 
tions of  safety  and  sanitation  in  their  work  were  not  the  first 
thought  of  the  unions.  The  workers,  as  a  result  of  habit  and 
ignorance,  were  strangely  unconcerned  about  this  matter. 
Reforms  in  this  direction  at  the  outset  had  to  come  largely 
from  sympathetic  observers.  But  since  better  ideals  have 
been  developed,  organized  laborers  strive  to  improve  the  san- 
itary, moral,  and  other  conditions  in  the  places  of  work. 
Their  main  object,  however,  was  for  a  long  time  to  raise 


Main  ob- 
jects of 
trade- 
unions 


248 


TRADE-UNIONS 


[CH.  27 


wages,  or  to  resist  any  decrease.  Shorter  hours  have  been  a 
prime  object  of  recent  years,  and  almost  coordinate  with  that 
of  higher  wages.  The  eight-hour  movement  has  declined 
somewhat  of  late,  but  a  few  years  ago  it  seemed  possible  that 
the  eight-hour  day  would  become  the  rule.  This  aim  has  never 
been  lost  sight  of,  however,  and  now  and  then  another  step 
is  taken  toward  it.  Labor  leaders  have  repeatedly  asserted 
in  recent  years,  when  the  two  demands  have  been  made 
together,  that  shorter  hours  were  more  desirable  than  in- 
creased wages. 


§  II.      THE    METHODS    OF    TRADE-UNIONS 

1.  The  union's  first  aim  is  to  get  control  of  all  the  labor 
\  force  in  the  market,  and  to  minimize  competition  among 

workers.  Every  labor  federation  aims  to  extend  its  control 
to  every  branch  of  its  trade.  A  sense  of  wrong  is  one  of  the 
strongest  forces  to  bring  the  workers  into  the  organization. 
The  appeal  to  a  common  interest  is  effective  in  times  of  great 
grievance,  as  it  was  effective  in  the  dangerous  times  of  the 
American  Revolution,  though  failing  during  the  Confedera- 
tion. The  unwilling  are  first  persuaded,  then  coerced  by 
threats,  by  petty  persecutions,  by  the  most  cruel  of  all  peace- 
ful weapons,  social  ostracism,  and  finally  by  personal  vio- 
lence. The  ' '  public  opinion  ' '  and  class  feeling  fostered 
among  workers  by  their  organization  are  analogous  to  the 
sense  of  patriotism  and  loyalty  in  the  country  at  large,  and 
at  times  displace  it,  as  is  seen  in  the  opposition  to  the  militia 
and  to  the  maintenance  of  public  order  at  times  of  strikes. 
The  individual  who  declines  to  enter  the  union  is  denounced 
as  a  traitor  and  made  to  feel  the  scorn  of  his  associates. 
When  all  these  measures  fail,  pressure  is  brought  to  bear 
upon  the  employer  to.  get  him  to  force  the  unwilling  workers 
into  the  union. 

2.  Its  next  aim  is  to  use  collective  in  the  place  of  indi- 
vidual  bargaining,  to  force  as  much  as  the  competitive  wage, 


§ii]  THE  METHODS  OF  TRADE-UNIONS  249 

and  more  if  possible.  The  term  collective  bargaining  has  The  union 
been  much  used  to  describe  bargaining  between  a  group  of  g^ure^ne 
labor  leaders,  the  delegated  representatives  of  the  working-  fuu corn- 
men,  and  a  group  of  employers  or  directors.  It  is  sometimes  ^  gVe 
claimed  that  all  the  trade-union  seeks  is  to  put  the  workman 
on  an  equality  with  the  employer  in  bargaining,  enabling 
him  to  get  all  he  would  if  competition  were  free  on  both 
sides.  It  is  said  that  organized  labor  simply  prevents  the 
employer  from  following  the  maxim  of  Napoleon  to  "divide 
and  conquer,"  from  meeting  his  employees  one  by  one  and 
forcing  his  own  terms  upon  them.  But  the  most  effective 
argument  in  organizing  the  trade-union  is  that  it  forces  a 
higher  wage,  more  than  the  market  would  warrant.  It  is 
sometimes  assumed  by  labor  leaders  that  competitive  wages 
would  be  very  low,  almost  starvation  wages,  and  anything 
above  that  level  is  credited  to  the  work  of  the  union;  while 
in  other  cases  where  the  wages  are  already  large,  the  purpose 
frankly  avowed  is  to  limit  the  labor  supply  in  the  particular 
trade  and  to  force  a  monopoly  wage  by  any  means  possible.  And  as 
One 's  opinion  of  trade-unions  is  likely  to  differ  according  as  ™uchs™^ 
they  work  in  one  or  the  other  of  these  ways.  The  impartial 
onlooker  sympathizes  with  the  efforts  of  the  trade-unions 
in  so  far  as  they  serve  merely  to  put  the  workers  on  an 
equality  with  the  employers  in  bargaining.  The  public 
wants  to  see  "  fair  play,"  and  up  to  a  certain  point  the 
union  is  merely  a  device  to  get  fair  play.  But  if  the  union  is 
a  device  to  defeat  competition,  to  force  artificially  high  wages, 
it  will  be  judged  differently.  The  public  readily  sees  that  if 
the  unions  force  more  than  a  fair  and  open  market  affords, 
it  is  rarely  at  the  expense  of  the  employer;  that  in  the  long 
run  it  is  at  the  expense  of  the  purchasing  public  itself,  in- 
cluding the  unprivileged  workmen  shut  out  from  the  monop- 
oly of  labor.  .;; 

3.     In  order  to  accomplish  their  ends,  the  trade-unions  The  issue  of 
seek  to  control  their  employers'  business  in  various  ways.   tjeclosejh 
They  demand,  first,  that  no  non-union  men  shall  be  employed  open  shop 


250 


TRADE-UNIONS 


[CH.  27 


even  at  union  wages  ;  they  demand  that  the  employer  shall 
help  them  to  force  his  employees  into  the  unions.  In  this 
very  usual  demand  for  the  "closed  shop"  or  "union  shop" 
the  public  can  see  very  little  justice.  On  this  point,  nearly 
always,  unions  forfeit  in  a  strike  the  sympathy  of  the 
public;  yet  the  unions  assert  that  it  is  almost  absolutely 
necessary  to  gain  this  point  in  order  to  carry  out  their 
objects.  If  a  union  and  a  non-union  man  work  side  by  side 
there  are  many  ways  in  which  the  employer  may  make  the 
union  man  suffer.  If  business  slackens,  it  is  likely  to  be  the 
union  man  that  is  discharged  ;  if  any  preference  is  given,  it 
is  to  the  non-union  man.  Certainly  all  will  agree  that  if  the 
unions  are  to  get  the  strength  to  enforce  all  their  demands 
it  is  essential  that  they  make  good  this  claim  which  leaves 
the  employer  almost  helpless.  Yet  it  certainly  is  not  essen- 
tial to  the  accomplishing  of  valuable  services  for  the  mem- 
bers of  the  union.  The  educational  and  mutual-benefit  fea- 
tures are  attained  without  this  means  ;  and  much  experience 
shows  that,  if  their  cause  is  strong,  the  organized  men 
can  carry  with  them  a  large  proportion  of  the  workers  and 
the  sympathy  of  the  public  in  a  contest  for  higher  wages.  It 
never  has  seemed  to  any  considerable  portion  of  the  public 
any  more  desirable  that  organized  labor  through  its  officers 
should  be  able  to  dictate  to  employees,  than  that  employers 
should  crush  the  workmen.  It  is  by  just  this  assumption  that 
union  advocates  beg  the  question  of  the  "  union  shop." 
,/  Further,  the  unions  direct  and  control  the  employment  of 
lab°r>  often  limit  the  number  of  apprentices  in  a  trade,  and 
assume  to  determine  who  shall  enjoy  the  privilege  of  learn- 
ing it.  They  limit  the  output,  fix  the  maximum  amount,  and 
forbid  the  use  of  labor-saving  machinery.  Whenever  the 
unions  are  charged  with  these  acts,  labor  leaders  either  deny 
the  facts  or  avoid  giving  a  direct  answer,  but  there  is  no 
doubt  that  the  charge  is  true  in  many  ways  and  in  many 
cases.  The  requirement  that  each  special  kind  of  work 
shall  be  controlled  by  a  special  trade,  and  disputes  between 


§11]  THE  METHODS  OF  TRADE-UNIONS  251 

rival  trades,  for  which  their  jealousies  are  responsible,  give 
rise  to  great  annoyance,  expense,  and  loss  to  employers  and 
to  the  entire  public. 

4.  The  strike  is  a  threat  and  a  mode  of  attack  to  enforce 
the  demands  of  the  union.  To  most  newly  organized  la- 
borers  the  union  appeals  mainly  as  an  instrument  for  strik- 
ing, for  threatening  the  employer  or  for  making  him  suffer. 
When  a  new  union  is  formed,  it  is  nearly  always  dedicated 
by  a  strike,  which  is  the  simultaneous  stopping  of  work  by  a 
number  of  workers.  A  strike  is  intended  to  force  the  em- 
ployer to  grant  the  wages  and  conditions  demanded.  Its 
effectiveness  lies  in  the  injury  which  it  occasions  or  threatens 
in  the  stopping  of  machinery,  the  ruin  of  material,  the  loss 
of  custom,  and  the  failure  to  complete  contracts  undertaken. 
Its  success  being  dependent  on  the  inability  of  the  employer 
to  fill  the  places  of  the  strikers,  their  energies  are  bent  on 
persuading  or  coercing  other  workers  from  taking  employ- 
ment. There  are  many  ways  of  coercing  workers  without 
personal  violence.  Public  opinion  does  much,  and  probably 
the  severest  of  all  coercive  measures  is  the  social  ostracism 
of  the  worker.  What  may  be  called  the  endless-chain  boy- 
cott is  an  excommunication,  without  measure  or  limit,  of  the 
non-union  worker  and  of  every  one  in  any  way  befriending 
him  or  the  employer.  So  far  as  in  their  power  lies,  the 
enraged  strikers  dissolve  the  very  bonds  of  society,  brother 
casts  off  brother,  and  mother  disowns  son.  The  unhappy  con- 
ditions in  the  coal  regions  in  1902  rivaled  the  tragedies  of 
civil  war.  A  reasonable  use  of  the  boycott,  refusal  to  main- 
tain social  relations  with  the  person  who  offends  one,  is 
doubtless  a  part  of  personal  liberty;  but  the  boycott,  as 
experience  shows,  has  moral  limits,  and  it  should  have  strict 
legal  limits.  Its  use  beyond  the  moderate  limit  of  the  first 
degree  of  personal  relations  is  anti-social  to  the  degree  of 
criminality,  whether  it  be  used  as  the  weapon  of  organized 
workers  or  of  organized  wealth. 

When  peaceable  means  fail,  often  there  is  a  recourse  to 


252 


TRADE-UNIONS 


[CH.  27 


Violence  in 
strikes  is 
mob  law 


violence  both  against  the  employer  and  his  property  and 
against  the  non-union  men.  The  evils  of  violence  in  strikes 
often  are  tardily  recognized  by  the  public,  whose  sympathy 
up  to  a  certain  point  is  with  the  striker  as  "the  under  dog." 
It  is  slow  to  realize  that  strike  violence  is  mob-law.  When- 
ever men  of  one  group  assume  the  right  to  coerce  forcibly  and 
to  wreak  their  hatred  against  one  of  their  fellow-workers,  it 
is  a  blow  at  political  liberty.  No  free  society  can  safely  go 
the  first  step  in  permitting  one  group  of  men  to  usurp  control 
over  others  in  this  way. 

5.  The  great  losses  caused  by  strikes  are  the  penalty  of 
an  unsolved  industrial  problem.  The  losses  to  workers  in 
wages,  to  employers  and  to  investors  in  income  and  property, 
and  to  the  public  in  interruption  of  business,  aggregate  an 
enormous  sum.  It  is,  however,  impossible  to  estimate  it  at 
all  exactly,  as  the  losses  are  in  many  cases  indirect  and 
intangible.  The  strikers  are  concerned  not  with  the  balance 
of  total  losses  and  total  gains  to  society  as  a  whole,  but 
with  the  net  gain  that  in  the  long  run  accrues  to  them.  It 
is  true  that  there  are  indirect  gains  not  easily  calculable, 
as  the  advance  of  wages  made  to  avoid  a  strike  while  the 
lesson  of  the  consequences  is  still  fresh.  Opinion  among 
workingmen  is  not  a  unit  as  to  the  value  of  strikes.  A  few 
years  ago  it  seemed  safe  to  say  that  strikes  were  declining 
as  compared  with  the  period  of  the  early  eighties.  It  is 
probably  true,  as  is  often  said,  that  as  laborers  become  edu- 
cated they  put  less  faith  in  strikes.  The  epidemic  of  labor 
troubles,  marking  the  years  from  1899  to  1903,  gave  no 
evidence  of  a  decrease  in  the  use  of  strikes,  yet  many  of 
these  were  due  to  the  recent  organization  in  various  trades. 
The  coal  strike  of  1902,  though  doubtless  due  to  real  griev- 
ances, was  opposed  by  the  officers  of  the  union,  an  unusually 
capable  set  of  men,  but  the  more  violent  and  discordant 
elements  overruled  the  more  pacific  counsels.  The  public  is 
perhaps  as  favorable  as  it  has  ever  been  to  the  cause  of 
labor,  but  it  appears  to  have  less  patience  with  strikes  than 


§111]  COMBINATION  AND  WAGES  253 

it  had  fifteen  years  ago,  and  strikes  usually  fail  'if  not 
backed  by  public  opinion.  The  public  has  not  as  yet  thought 
out  consistent  conclusions  on  the  question  of  the  rights 
of  the  union.  It  is  just  now  much  impressed  with  the  value 
of  arbitration.  As  experience  destroys  the  unsound  senti- 
ments, and  divides  the  wise  from  the  unwise  measures,  a 
peaceable  solution  of  industrial  differences  must  and  will  be 
found. 

§  III.      COMBINATION   AND  WAGES 

1.  Wages  in  particular  industries  often  are  maintained  wages  are 
above  the  competitive  rate.  The  older  economic  writers  were  Ja^dbya 
somewhat  unsympathetic  with  trade-unions,  and  were  even  monopoly 
inclined  to  deny  that  organization  could  be  helpful  in  any 
way  in  raising  wages.  This  view,  it  must  now  be  recognized, 
was  mistaken,  and  overlooked  the  hindrances  to  competition 
and  the  effective  economic  forces  that  organization  can  bring 
into  play.  The  sympathies  of  most  men  favor  the  wage- 
earner  so  strongly  that  they  hesitate  to  express  an  opinion 
in  any  way  unfavorable  to  his  efforts  to  raise  wages.  But 
the  view  of  the  economic  theorist  as  to  the  services  of  the 
union  cannot  be  as  roseate  as  is  that  of  the  union  labor 
leader.  The  general  proposition,  however,  is  applicable,  that 
wherever  it  is  possible  to  limit  supply,  prices  may  be  raised. 
If  men  fitted  to  do  a  certain  work  are  not  permitted  to  do 
it,  labor  in  the  special  industry  becomes  more  scarce  and 
consequently  more  highly  valued.  This  involves  the  result 
that  some  men  are  forced  to  remain  where  they  get  lower 
wages  than  they  could  earn  if  free  to  act.  The  temporary 
need  of  the  employer  may  enable  the  union  to  force  from 
him  a  division  of  his  profits.  [Jf  the  trade-union  watches  its 
opportunity  and  takes  occasion  to  strike  when  a  failure  to 
fill  orders  would  cause  him  great  loss,  it  may  compel  him  to 
pay  for  a  time  more  than  the  normal  value  of  the  labor. 
It  may  well  be  doubted  whether  such  action  on  the  part  of  i 


254 


TRADE-UNIONS 


[CH.  27 


labor  is  generous,  fair,  honest,  or  in  the  long  run  wise  •  but 
that  it  may  be  immediately  effective  cannot  be  denied.)  By 
the  principle  of  complementary  goods  an  essential  kind  of 
labor  can  be  given  an  artificially  high  value,  if  its  supply 
can  be  controlled.  If  only  the  labor  that  is  ready  and  willing 
to  come  in  to  take  the  place  of  the  strikers  can  for  a  time 
be  kept  out,  wages  may  be  fixed  practically  according  to 
monopoly  principles,  later  to  be  discussed  in  connection  with 
capitalistic  organization. 

2.  Trade-unions  can,  in  various  ~but  limited  ways,  set  in 
motion  economic  forces  to  increase  the  productiveness  of 
labor.  It  is  difficult  to  take  a  moderate  view  of  trade-unions ; 
it  is  easier  to  go  to  one  extreme  or  the  other.  In  a  book  by 
Trant,  reprinted  from  the  English  edition  and  circulated  by 
the  American  Federation  of  Labor  as  representing  its  theory 
and  claims,  all  the  advances  in  wages  that  have  been  made 
are  said  to  be  due  to  the  trade-unions.  This  claim  is  believed 
by  many  besides  the  members  of  trade-unions.  The  thought 
is  sometimes  expressed  even  by  social  students  that  but  for 
the  trade-unions  wages  in  America  would  be  the  same  as  in 
1850.  Many  well-known  facts  should  cause  such  an  opinion 
to  be  accepted  with  hesitation,  to  say  the  least.  Only  about 
one  tenth  of  the  workers  in  England  are  unionists  and  of  the 
twenty-two  million  workers  in  the  United  States,  far  less 
than  ten  per  cent,  are  organized.  Can  it  be  maintained  that 
one  tenth  of  the  labor  supply  fixes  the  value  of  all?  In 
many  lines  where  labor  is  not  organized,  as  in  teaching, 
clerical  positions,  professional  and  domestic  service,  wages 
have  risen  even  more  than  in  organized  trade.  The  evidence 
advanced  to  support  the  extreme  claim  is  that  wages  are 
higher  in  some  organized  trades  than  in  other  unorganized 
trades  requiring  the  same  grade  of  laborers.  Trant  says 
that  "  where  there  are  no  unions  wages  should  be  lower. 
This  is  exactly  the  case ' ' ;  and  he  quotes :  ' '  Wherever  we  find 
union  principles  ignored,  a  low  rate  of  wages  prevails  and 
the  reverse  where  organization  is  perfect."  But  he  later 


COMBINATION  AND  WAGES  255 

explains  in  part  this  difference:  "  The  union  men  are  the 
best  workmen  and  often  employers  pay  a  man  more  than 
union  wages.  This  is  not  surprising  as  no  man  can  be  a  union 
carpenter  unless  he  be  in  good  health,  have  worked  a  certain 
number  of  years  at  his  trade,  be  a  good  workman,  of  steady 
habits  and  good  moral  character." 

If  this  be  true,  it  is  in  accordance  with  strict  competitive  Certain 
principles  that,  as  the  elite  of  the  trade,  they  should  get  Question- 

aoie  reasons 

higher  wages  than  those  outside.  Moreover  the  unions  exist  why  union 
mainly  in  the  more  populated  places  where  cost  of  living,  JJJJJS^ 
wages,  and  all  prices  range  higher  than  in  the  towns.  A  higher 
much  higher  standard  of  work  prevails  in  the  cities,  both 
among  union  and  non-union  men,  and  the  old  men  and  the 
inefficient  drift  away  to  the  smaller  towns  and  the  places 
where  wages  are  lower.  Many  of  the  differences  are  explic- 
able without  taking  any  account  of  the  union.  So  far  as 
unions  tend  toward  intelligence,  education,  sobriety,  effi- 
ciency, fuller  and  fairer  competition,  they  are  economic 
factors  in  all  branches  of  industry,  and  it  cannot  be  doubted 
that  they  do  work  in  some  measure  in  all  these  ways.  So 
far  also  as  they  strengthen  the  bargaining  power  of  the 
laborers,  or  as  they  can  enforce  a  monopoly  of  labor  in  a  par- 
ticular trade  and  locality,  they  can  secure  the  full  competi- 
tive or  even  a  monopoly  price. 

3.  (Wages  viewed  in  general  industry,  and  in  the  long 
run,  are  determined  mainly  ~by  impersonal  economic  forces. 
That  implies  the  converse,  that  they  are  not  determined 
mainly  by  the  trade-unions.)  This  statement,  in  fact,  is  ad- 
mitted in  calmer  moments  by  the  extreme  partisans  of  the  workers 
unions.  Even  the  book  before  quoted  says  somewhat  vaguely 
that  "it  is  an  error  to  think  that  the  trade-union  seeks  to 
determine  the  rate  of  wages.  It  cannot  do  that.  It  can  do  no 
more  than  affect  them."  Again  it  says:  "  Capital  is  in- 
creasing faster  than  population.  ...  It  seems  therefore 
merely  in  obedience  to  natural  laws  that  wages  should 
rise."  Men  can  easily  see  personal  and  immediate  results. 


Labor 
organiza- 
tions a  minor 
factor  in 
lifting  the 
mass  of  the 


256 


TRADE-UNIONS 


[CH.  27 


The  chief 
factors  de- 
termining 
wages 


They  cannot  follow  out  the  impersonal  and  ultimate  work- 
ings of  economic  forces.  The  leaders  make  exaggerated 
claims;  laborers  believe  them  and  pay  their  dues  more  read- 
ily; the  public  believes  them  and  is  the  more  inclined  to 
pardon  the  excesses  of  so  important  an  institution.  That 
wages  in  a  number  of  special  trades  are  raised  in  a  consider- 
able degree  cannot  be  questioned.  The  open  or  secret  use  of 
violence  and  other  anti-social  forces  make  much  of  this 
boasted  service  to  some  of  the  workers,  an  injury  to  others, 
and  an  occasion  of  reproach  from  the  citizen  who  condemns 
the  spirit  of  lawlessness  thus  encouraged.  The  chief  factors 
tending  to  raise  the  general  standard  of  wages  are  the  pro- 
ductiveness of-  industry,  peas%-&£dep,  and  security  to  wealth, 
honesty  in  man  and  master,  in  lawmaker  and  in  judge,  the 
efficiency  and  intelligence  of  the  workers,  and  an  earnest 
effort  on  their  part  to  get  the  share  that  competition  would 
accord  them.  Chiefly,  though  not  exclusively,  because  of 
their  bearing  on  this  last  factor,  trade-unions  have  a  useful, 
even  though  subordinate,  part  in  the  regulating  of  wages 
over  the  whole  field  of  employment. 


DIVISION  B-ENTERPRISE  AND  PROFITS 


CHAPTER  28 

PRODUCTION  AND  THE  COMBINATION  OF 
THE  FACTORS 

§  I.      THE   NATURE   OP  PRODUCTION 

1.  The  aim  of  industrial  effort  is  the  increase  of  the  quan-  Man's 
tity  and  quality  of  scarce  goods;  this  is  economic  production. 
The  thought  has  become  familiar  to  the  student  that  the  production 
supply  of  economic  resources  of  whatever  sort  is  limited,  Jj]^1* 
while  the  wants  are  practically  unlimited.  A  supply  of 
consumption  goods  meets  a  perennial  stream  of  wants,  the 
result  being  that  value  is  attributed  to  things.  The  aim  of 
production  is  to  add  to  scarce  things,  to  make  the  supply  of 
goods  as  large  as  possible.  There  is  occasion  here  to  recall  the 
thought  of  the  two  aspects  of  production  noticed  in  Chapter 
24.  Man's  part  in  production  is  passive  when  goods  come 
into  existence  without  his  effort.  One  can  imagine  the 
indolent  savage  of  the  tropics,  lying  under  the  banana-tree, 
letting  the  fruit  drop  into  his  mouth.  One  can  conceive  of 
a  tribe  living  upon  manna,  where  every  day  the  people 
awoke  to  discover  a  certain  amount  of  food  provided  to  each 
person 's  hand.  Though  no  effort  could  increase  that  amount, 
still,  if  the  food  differed  in  flavor  and  the  better  qualities 
were  rare,  value  would  come  into  existence  and  exchange 
n  •  257 " 


258 


PRODUCTION  AND  THE  FACTORS 


[CH.  28 


The  four 
essential 
character- 
istics of 
value 


would  arise.  Now  there  is  something  very  analogous  to  that 
in  daily  experience.  There  are  some  goods  which  effort  can 
do  little  to,  increase.  Usually,  however,  there  is  a  possibility 
of  change  and  adaptation  to  make  them  better  suited  to 
needs,  and  there  is  required  the  use  of  intelligence  to  choose 
among  the  goods  and  to  employ  them  in  the  best  way.  Fur- 
ther, man  can  intervene  and  direct  the  course  of  industry ;  he 
does  not  merely  gather  what  is  provided.  It  is  this  active 
intervention  and  effort  that  is  here  to  be  considered. 

2.  To  have  value,  a  thing  must  be  of  the  right  stuff,  in 
the  right  form,  at  the  right  time,  and  at  the  right  place  to 
gratify  wants.     A  distinction  is  sometimes  made  between 
elemental,  form,  time,  and  place  value.     It  is  a  mistake  to 
say  that  the  value  of  anything  is  due  to  any  one  of  these 
features,  for  to  have  value  all  must  be  united  in  a  single 
thing.    But  the  distinction  is  useful  in  emphasizing  the  miss- 
ing characteristics,  which  if  supplied,  cause  value  to  emerge. 
Ice  may  be  considered  to  have  form  value  when  produced 
artificially  by  a  machine,  time  value  when  stored  from  winter 
to  summer,  and  place  value  when  brought  from  the  north  to 
the  south.    But  not  less  essential  is  the  psychological  condi- 
tion of  a  hungry  and  thirsty  population  ready  to  consume 
the  ice.     Any  act  or  agent  is  said  to  be  productive  which 
works  in  any  one  of  these  respects:  puts  things  in  better 
form,  or  in  a  more  fitting  place,  or  provides  them  at  a  more 
fitting  time  to  serve  human  wants. 

3.  Economic  production   (in  contrast  with  technical  or 
merely  formal  production]  is  such  a  change  in  goods  as  is 
attended  by  an  increase  in  value.    It  is  often  well  to  contrast 
form,  appearance,  imitation,  with  the  thing  itself,  the  reality. 
Men  sometimes  go  through  the  forms  of  study  when  their 
eyes  and  thoughts   are  wandering;   through   the   form   of 
getting  a  college  education  when  they  are  simply  having  a 
good  time.     Likewise  in  production  there  is  the  form  and 
the  reality.     The  young  lady  just  out  of  boarding-school 
rarely  produces  a  masterpiece  with  the  tubes  and  brushes 


§IJ  THE  NATURE  OF  PRODUCTION  259 

that  Raphael  might  have  used.  The  justification  for  amateur 
work  is  to  be  found  in  the  doing  and  not  in  the  market  value 
of  the  result.  Blue  rosebuds,  painted  with  loving  if  unskilled 
touch  on  red  velvet  slippers,  may  bloom  into  a  romance  and 
happiness;  but  to  the  economist  this  appears  to  be  a  con- 
sumption of  good  pigment  for  amusement,  not  a  creation  of 
value.  The  difference  between  the  form  and  value  of  pro- 
ductive effort  becomes,  in  the  study  of  business  organization, 
a  most  essential  question.  The  significance  of  leadership  and 
control  of  industry  is  found  in  this  fact  that  economic  goods 
may  be  united  to  produce  results  having  either  a  less  or  a 
greater  value  than  the  materials  that  are  used. 

4.  Individual  acquisition  may  &#-  contrasted  .with  social  Acquisition 
production  in  cases  where  the  individual  increases  his  wealth  V8r^^ 
at  the  expense  of  others,  without  adding  to  value.  Most) 
economic  efforts  increase  the  income  of  the  individual  anq 
the  income  of  society  at  the  same  time.  The  fruits  of  the 
field  and  the  uses  of  machines  are  net  additions  to  current 
income ;  they  are  not  merely  subtracted  from  the  income 
of  one  and  added  to  that  of  another.  The  increase  of 
products  by  labor  may  depress  somewhat  the  exchange  value 
of  competing  labor,  but  the  general  welfare  is  furthered  by 
the  greater  abundance.  With  very  slight  qualification  it  is 
true  that  in  these  cases  the  good  of  each  is  the  good  of  all. 
But  in  some  forms  of  human  effort,  social  and  individual 
interests  clash.  When  two  men  bet,  one  gains  and  the  other 
loses.  The  gambler's  gain  is  a  loss  not  only  directly  to  his 
beaten  opponent  but  indirectly  to  society.  Certain  forms 
of  speculation  approach  dangerously  near  to  the  appropria- 
tion of  the  goods  of  others,  and  others  become  outright 
stealing,  or  cheating  so  nearly  like  stealing  that  it  would  be 
treated  as  a  crime  if  discovered.  But  many  a  man  prowls 
along  the  border-line  of  crime  all  his  life  and  succeeds  in 
making  large  gains  without  falling  into  the  clutches  of  the 
law.  Cheating  that  can  be  detected,  and  outright  stealing, 
are  prohibited  by  the  law  not  because  the  burglar  is  an 


260 


PRODUCTION  AND  THE  FACTORS 


[CH.  2 


idler;  he  loses  sleep;  he  has  his  trials  too.  The  pursuit  of 
burglary  requires  courage,  effort,  and  ingenuity,  but  society 
does  not  reward  these  as  virtues  nor  recognize  as  production 
the  transfer  of  wealth  from  the  bank-vault  to  the  pocket  of 
the  burglar.  It  is  the  aim  of  social  institutions  to  harmonize 
individual  and  social  interests  in  the  pursuit  of  wealth,  to 
force  men  into  lines  of  action  where  individual  acquisition 
adds  to  the  sum  of  social  utilities.  But  there  are  many  mar- 
ginal cases  where  human  justice  discriminates  only  in  a 
bungling  way,  and  many  controverted  questions  arise  at 
the  meeting-point  of  ethics,  economics,  and  law. 
industries  5.  In  this  sense,  productive  industries  may  be  distin- 
morearleBs  Ou^e^  from  unproductive  ones.  The  old  distinction  be- 
productive  tween  productive  and  unproductive  labor  rested  on  the  idea 
that  production  must  be  embodied  in  material  and  lasting 
form.  We  have  rejected  this  for  the  thought  that  the  tests 
of  production  are  to  be  found  in  feeling,  not  in  outward 
things.  The  distinction,  therefore,  between  productive  and 
unproductive  labor  must  now  be  of  a  very  different  kind. 
Viewed  from  the  social  standpoint,  the  efforts  of  men  may 
be  seen  to  be  directed  along  more  or  less  productive  lines. 
Enterprise  and  effort  shade  off  from  the  more  to  the  less 
productive,  from  the  extreme  where  the  value  is  a  net  addi- 
tion to  wealth,  through  other  cases  where  one's  gain  is  partly 
at  the  cost  of  others,  to  fraud  and  crime  where  there  is 
merely  a  transfer  of  ownership. 


The  factors 
of  produc- 
tion defined 


§  II.      COMBINATION  OF  THE   FACTORS 

1.  The  various  parts,  materials,  and  agents  that  unite  to 
form  products  are  called  the  factors  of  production.  In  a 
general  sense  every  separate  thing  that  enters  into  industry 
is  a  factor;  as,  in  agriculture,  for  example,  the  seed,  plows, 
fields,  fences,  barns,  cattle,  labor.  But  usually  in  economic 
discussion,  these  numerous  factors  are  grouped  in  large 
classes.  The  main  factors  are  two,  variously  named  as  man 


§11]  COMBINATION  OF  THE  FACTORS  261 

and  nature,  or  labor  and  material  agents,  or  humanity  and 
wealth.  Rejecting,  as  we  have,  the  old  view  as  to  the  nature 
of  consumption  goods  and  as  to  the  nature  and  possibility 
of  the  distinction  between  "land"  and  artificial  capital,  we 
class  under  wealth  all  material  economic  agents  whatsoever. 
The  discussion  of  labor  and  wages  has  broadly  laid  down  the 
principles  that  apply  to  the  value  of  human  effort,  but  the 
factor  of  directing  energy  presents  in  modern  society  so 
many  important  features  that  it  calls  for  special  and  fuller 
consideration. 

2.     The  economic  progress  of  society  has  been  marked  by  Progressive 
decreasing  dependence  on  the  bounties  and  chances  of  na-  c^froiover 
ture  and  by  increasing  control  of  natural  forces  by  man.   natural 
Various  stages  of  progress  in  human  history  have  been  recog-  con< 
nized.     First  is  the  stage  of  appropriation— the  stage  of 
hunting,  or  of  fishing,  or  of  gathering  fruits.    Man  in  this 
stage  is  still  an  animal  in  his  economic  methods,  not  guid- 
ing   and   controlling   nature,    but    merely    gathering   what 
nature  chances  to  bring  forth.     The  limitations  to  man's 
powers  in  this  stage  are  marked.    There  is  excess  of  supply 
and  waste  at  one  season,  scarcity  and  great  suffering  at 
another.    With  such  crude  utilization  of  the  bounties  of  na- 
ture, a  vast  area  will  support  but  a  small  population.    When 
sheep  and  cattle  have  been  domesticated,  and  where  there 
is  a  large  area  for  grazing,  industry  rises  to  the  pastoral 
stage.     While  still  dependent  on  nature's  bounties  for  the 
feeding  of  his  cattle,  man  is  hourly  intervening  to  increase, 
regulate,  and  improve  the  supply  of  food  and  materials. 
Famines  are  more  rare,  economic  welfare  is  greater,  a  greater 
population  is  nourished  on  the  same  area.     The  agricultural 
stage  begins  whenever  man  plants  seeds,  trims,  tends,  and 
increases  by  his  care  the  supply  of  vegetable  food.     This 
is  a  still  greater  intervention  in  the  course  of  nature.    Man 
anticipates  the  future,  directs  forces,  and  groups  materials 
to  his  purpose  of  getting  a  regular  food-supply.    He  is  thus 
himself  forced  into  settled  life,  begins  hand-production,  and 


262 


PRODUCTION  AND  THE  FACTORS 


[CH.  28 


makes  the  first  steps  in  commerce.  Then  gradually  comes 
the  industrial  stage,  in  which  control  over  nature  grows, 
supplies  increase,  machinery  and  motive  forces  are  utilized, 
and  humanity  is  in  the  full  tide  of  industrial  development. 
These  are  not  sharply  marked  changes,  but  throughout  all 
there  is  a  growth  of  security,  of  certainty,  and  of  productiv- 
ity. With  man's  increasing  power  and  foresight,  chance  is 
lessened,  for  directing  energy  takes  its  place. 

3.  For  a  high  efficiency  of  production,  as  a  whole,  condi- 
tions must  favor  the  best  organization  and  direction  of  in- 
dustry. Industry  is  dependent  primarily  upon  natural 
resources.  Climate,  rainfall,  iron  deposits,  fuel,  supply  of 
wood  or  coal,  predetermine  in  large  measure  the  limits  within, 
and  the  direction  in  which,  the  industry  of  any  community 
can  move.  The  progress  of  production  depends  also  on  an 
increasing  efficiency  of  labor  as  embodied  in  individual  men, 
and  upon  social  and  political  conditions  making  possible 
an  increase  of  capital.  But— a  condition  as  important  as 
any  of  these— production  is  dependent  also  on  a  wise  com- 
bination of  the  factors.  Social,  political,  and  economic  con- 
ditions must  be  such  as  to  call  forth  the  factor  of  direction 
and  control  of  industry,  to  make  possible  industrial  progress. 
This  is  one  of  the  greatest  sources  of  America's  superiority 
to-day.  It  has  been  strikingly  said  that  it  is  now  no  longer 
"young  America  and  old  Europe,"  but  ''old  America  and 
young  Europe."  America  is  older  in  industrial  experi- 
ence; Europe,  with  undeveloped  resources,  awaits  the  touch 
of  American  methods  and  machinery.  There  are  dynamic 
forces  in  American  society  not  present  in  equal  degree  in 
any  other.  It  is  therefore  not  alone  the  great  resources  of 
coal  and  iron,— equal  resources  may  be  found  in  unexplored 
parts  of  the  world,— it  is  the  dynamic  social  forces,  inven- 
tion, enterprise,  and  organization,  which  have  brought  Amer- 
ica to  the  forefront  in  industry.  Her  natural  resources  have 
thus  yielded  an  incentive  and  a  premium  to  enterprise  as  a 
sort  of  by-product.  Absence  of  caste,  political  liberty,  the 


§H]  COMBINATION  OF   THE   FACTORS  263 

democracy  following  the  spread  of  the  frontier,  have  not 
made  it  possible  for  every  one  to  succeed,  but  they  have  made 
it  possible,  as  nowhere  else  in  the  world,  for  real  ability  to 
scale  the  barriers  of  birth,  poverty,  and  hardship.  A  con- 
servative population  never  can  equal  a  progressive  popula- 
tion in  industrial  efficiency.  It  has  been  remarked  that 
America  has  little  to  fear  from  Oriental  competition  so 
long  as  the  avenues  of  education  and  enterprise  are  open  to 
her  young  men,  insuring  her  the  highest  capacity  in  the 
organization  and  direction  of  industry. 

4.  A  high  efficiency  of  industry  is  dependent  on  many  Growing 
social  causes  making  possible  a  great  specialization.  It  was  JJJ^Jf^ 
said  in  another  connection  that  division  of  labor  is  dependent  dustry 
upon  the  size  of  the  market.  With  a  large  population  massed 
at  one  spot,  so  that  the  demand  for  even  the  less  important 
products  is  large,  there  may  be  a  high  specialization  of 
industry.  An  increase  of  transportation,  such  as  railways 
and  telegraphs,  is  equivalent  for  many  economic  purposes 
to  growth  of  population  on  one  spot.  In  colonial  days  it 
took  ten  days  to  go  from  Boston  to  Philadelphia,  and  two 
weeks  to  go  to  Washington.  San  Francisco  is  now  for  many 
economic  purposes  but  one  fourth  as  far  from  Boston  as 
Washington  was  at  that  time.  California  and  the  eastern 
states  are  distant  only  thirty  minutes  by  telegraph  and  three 
days  and  a  fraction  by  railroad,  and  are  thus  in  many  re- 
spects in  the  same  market.  The  great  development  during  the 
past  century  in  the  means  of  communication  and  of  carriage 
has  made  possible,  as  never  before,  the  massing  of  population 
to  secure  the  advantages  of  division  of  labor  in  most  lines, 
without  meeting  the  hitherto  insurmountable  difficulty  in  the 
securing  of  food  for  such  large  numbers  in  a  limited  space. 
The  population  draws  its  food  from  the  whole  vast  area; 
whereas  it  is  massed  at  the  points  more  favorable  for  other 
products  and  can  make  use  of  the  most  highly  specialized 
machinery.  These  several  conditions  thus  have  favored  the 
growth  of  large  industry  under  a  single  control  and  direc- 


264 


PRODUCTION  AND  THE  FACTORS 


[CH.  28 


tion,  on  a  scale  never  before  approached.  These  changes 
have  brought  in  their  train  social  problems  connected  with 
the  concentration  of  economic  power.  It  remains  to  be  seen 
whether  the  unquestioned  economies  of  this  new  organization 
can  be  retained  and  improved  while  it  is  divested  of  its  evils. 
5.  With  the  growing  division  of  labor,  grows  the  need  of 
the  highest  ability  for  the  directing  of  industry.  Ability 
may  be  judged  by  various  standards.  From  one  point  of 
view,  the  scientific  mind,  grouping  facts  in  the  cold  light 
of  reason  to  arrive  at  truth,  is  the  highest  type.  But  su- 
preme, each  in  his  own  sphere,  are  also  the  artist  expressing, 
through  painting,  poetry,  dramatic  action,  and  music,  the 
subtleties  and  complexities  of  feeling,  the  moral  philosopher, 
the  prophet,  the  preacher,  in  the  best  sense  of  the  term  the 
teacher,  all  aiding  to  guide  the  spiritual  forces  of  humanity 
along  lines  that  make  for  social  welfare.  Not  least  is  the 
business  enterpriser,  whose  function  is  to  direct  the  economic 
forces  for  production.  It  is  vain  to  assign  a  mean  place  to 
the  organizing  intelligence  and  its  social  work.  Its  im- 
portance grows  apace  with  the  growing  magnitude  and  com- 
plexity of  industry.  Misjudgment  now  will  destroy  more 
wealth,  and  wise  judgment  can  produce  larger  results,  than 
ever  before.  The  captain  of  industry  also  may  work  as  an 
artist  or  as  a  gambler;  he  may,  by  the  methods  he  pursues, 
uplift  the  moral  plane  of  his  society  or  he  may  help  to 
corrupt  and  degrade  it.  No  citizen  is  in  control  of  more 
potent  influence  for  good  or  ill  than  the  successful  business 
organizer.  On  the  attitude  of  society  toward  him,  and  on 
the  standards  to  which  he  is  held,  depend  in  large  measure 
the  use  that  will  be  made  of  his  exceptional  powers. 


CHAPTER  29 

BUSINESS   ORGANIZATION  AND   THE 
ENTERPRISER'S   FUNCTION 

§  I.      THE   DIRECTION   OF   INDUSTRY 


1.  In  the  simplest  kinds  of  individual  production  the  judgment 
value  of  the  results  depends  largely  on  intelligent  choice.  andself- 
Even  for  the  solitary  worker  the  choice  of  the  right  time  elements  i 
to  do  work  is  most  important.  The  first  thing  Robinson  personal 
Crusoe  did  was  to  turn  to  the  ship  to  save  as  much  as 
possible  of  the  cargo  before  it  was  dashed  in  pieces  by  the 
waves.  If  he  had  begun  first  to  till  the  soil  to  provide 
a  future  supply  of  food  it  would  have  shown  one  kind  of 
foresight,  but  it  would  have  shown  very  poor  judgment. 
Every  moment  of  delay  in  recovering  the  cargo  of  the 
wrecked  vessel  cost  him  many  useful  materials.  The  hum- 
blest farmer  has  a  great  range  of  choice  and  a  need  of  good 
judgment  in  fixing  the  time  to  sow,  to  reap,  to  do  each  simple 
task.  There  is  the  same  need  to-day  for  the  small  shop- 
keepers, for  the  blacksmiths,  for  the  small  producers  of  all 
kinds  to  make  wise  choice  of  time  in  the  use  of  their  own 
labor.  There  is  also  a  wide  range  of  choice  in  the  distribut- 
ing and  combining  of  labor,  agents,  and  materials.  A  lim- 
ited supply  of  agents  can  be  used  to  secure  a  variety  of 
goods,  more  or  less  desirable.  There  are  many  chances  for 
mistake,  but  in  the  long  run  it  is  judgment,  not  chance,  that 
determines  the  success  of  one  man  as  compared  with  another. 
There  is  a  choice  in  ways  and  methods  by  which  a  thing 
can  be  done.  There  are  many  wrong  ways,  there  is  but  one 


266 


THE  ENTERPRISER'S  FUNCTION 


[CH.  29 


Direction  of 
a  group  of 
workers 


Direction  of 
interrelated 
groups 


best  way,  at  any  stage  of  industrial  progress.  While  most 
work  is  done  in  customary  ways  and  little  independent 
judgment  is  required,  yet  in  every  business  from  time  to 
time  new  problems  arise  and  call  for  an  exercise  of  choice 
as  to  methods.  Moral  qualities  are  continually  called  for, 
such  as  control  of  impulse,  and  the  giving  up  of  the  comfort 
of  the  moment.  The  wisdom  of  our  fathers  is  embodied  in 
a  multitude  of  proverbs  that  suggest  the  wise  course.  Men 
must  "  make  hay  while  the  sun  shines,"  not  lie  in  the 
shade.  But  virtue  fails  less  often  from  lack  of  knowledge 
than  from  lack  of  will.  As  men  differ  in  judgment,  charac- 
ter, and  will-power,  their  products  differ,  even  in  the  simplest 
circumstances.  The  ability  to  choose  and  to  do  wisely  is  an 
element  in  personal  skill. 

2.  When  men  work  in  an  associated  group,  the  direction 
of  effort  becomes  relatively  more  important.     The  first  and 
simplest   advantage   of    association   is   working   in   unison. 
Men  unite  their  muscular  efforts  for  a  single  task,  and  ac- 
complish what  is  impossible  to  them  working  singly.     But 
when  many  work  in  unison,  the  right  selection  of  time  and 
way  is  of  greater  importance;  a  mistake  will  waste  more 
materials  and  agents.     If  association  is  to  yield  its  advan- 
tages, there  must  be  division  of  labor;  hence  harmony  of 
effort,  hence  agreement  or  direction.     While  the  gain  of 
well-directed  association  is  large,  the  waste  of  ill-directed 
effort  is  greater,  when  specialization  has  taken  place,  than 
with  isolated  workers.    Most  communal  societies  have  failed 
because  of  the  lack  of  a  good  head.     The  few  exceptional 
successes  have  been  due  to  the  presence  of  a  man  of  superior 
ability,  such  as  George  Rapp  of  the  Harmonist  Community, 
who,  had  he  lived  in  this  day,  could  have  become  easily  the 
head  of  a  great  business  corporation. 

3.  Where  various  industrial  groups  are  associated,  direc- 
tion becomes  still  more  important.     In  the  single  group  it 
is  an  internal  harmony  alone  that  is  needed.     The  work  of 
a  dozen  men  must  be  so  arranged  that  each  is  in  his  fitting 


§11]  QUALITIES  OF   A  BUSINESS  ORGANIZER  267 

place.  But  as  this  group  comes  into  contact  with  others,  the 
relationship  becomes  two-fold,  and  there  must  be  both  in- 
ternal and  external  harmony.  The  more  complex  the  eco- 
nomic organization  of  society,  the  more  the  chance  of  mistake 
and  the  more  injurious  are  the  mistakes  to  a  wide  range 
of  interests.  Large  amounts  of  capital  and  labor  can  be 
rapidly  lost  through  lack  of  wise  direction  of  associated 
groups. 

4.  The  increased  efficiency  of  industry  has  been  accom-  Greatest 
panied  by  the  specialization  of  control.  The  crude,  early  need  now  of 
methods  of  enforcing  harmony  in  industry  were  slavery  and  direction  of 
political  subordination.  Under  division  of  labor,  with  free 
workmen,  industry  is  ruled  by  impersonal  economic  forces 
that  bring  the  less  capable  under  the  direction  of  the  more 
capable.  This  work  is  rudely  done,  no  doubt,  but  the  penal- 
ties of  bad  direction  of  labor  and  capital  are  so  great  that 
blundering  cannot  be  permitted.  The  man  who  shovels  dirt 
must  do  it  at  the  right  time  and  place  if,  in  this  complex 
society,  it  counts  for  something  and  gives  the  effort  value. 
If  he  cannot  choose  well  for  himself,  he  comes  under  direc- 
tion. The  average  man  cannot  decide  nearly  as  well  here 
as  he  could  on  a  desert  island  where  and  when  to  put  in 
his  spade.  There  it  would  be  to  raise  food  for  the  current 
year;  here  it  may  be  to  dig  a  canal  or  a  tunnel  whose  uses 
will  not  become  actual  for  many  years.  The  more  distant 
the  end  sought,  the  more  difficult  is  the  choice.  To  every 
worker,  according  to  his  personal  skill,  is  left  some  degree  of 
choice  in  the  method  of  his  work,  but  in  a  large  part  of  in- 
dustry the  range  of  choice  is  very  narrow.  The  man  with  the 
shovel  and  the  man  with  the  hoe  come  under  direction. 


§  II.      QUALITIES    OF    A   BUSINESS    ORGANIZER 

1.     The  organizer  and  director  of  industry  must  first  have  Technical 
technical  knowledge  of  methods,  processes,  and  materials. 
The  qualities  required  in  the  direction  of  industry  are  im- 


268 


THE  ENTERPRISER'S  FUNCTION 


[CH.  29 


Judgment 
of  men 


Foresight  in 
commercial 
affairs 


plied  in  the  foregoing  section,  but  they  may  be  more 
specifically  enumerated.  Knowledge  of  technical  processes 
is  relatively  more  important  in  the  direction  of  industry  in 
the  earlier  stage.  In  the  single  independent  producer  it  is 
the  quality  most  desirable.  He  must  know  the  quality  of  the 
materials  with  which  he  works  and  the  best  modes  of  com- 
bining them.  But,  as  industrial  organization  becomes  more 
complex,  only  a  broad  knowledge  and  ability  to  judge  of  the 
results  of  different  processes  and  to  compare  plans  are  ne- 
cessary in  the  organizer.  He  can  hire  the  technical  knowledge 
of  details  required  in  the  larger  management  of  business. 
Draftsmen,  engineers,  pattern-makers,  men  with  far  more 
education  and  capacity  in  certain  lines  than  the  business 
manager,  work  under  his  direction. 

2.  The  organizer  requires  ability  to  judge  men  and  tact 
in  relations  with  them.    In  the  small  group,  ability  to  get  on 
well  in  personal  contact  with  workmen  is  of  great  impor- 
tance.    Especially  rare  is  the  genial  manner  that  wins  the 
confidence  and  even  the  affection  of  the  men.    A  sense  of  hu- 
mor and  the  ability  to  turn  a  joke  are  said  to  have  obviated 
many  a  strike  and  thus  to  have  prevented  losses  both  to 
the  employer  and  to  the  men.    In  large  affairs  much  of  this 
managing  tact  can  be  hired  in  good  foremen ;  but  the  organi- 
zer must  still  have  a  knowledge  of  men,  ability  to  judge  of 
human  nature,  to  select  his  subordinates,  and  to  animate  them 
with  his  own  purposes  and  plans.     Mr.  Carnegie  has  said 
that  an  appropriate  epitaph  for  himself  would  be,  "  He 
was    a    man    who    knew    how    to    surround    himself    with 
men  abler  than  he  was  himself."     That  seems  too  modest; 
but    in    a    sense    it    is    not,    because    he    claims    for    him- 
self, and  justly,  the  highest  of  all  industrial  qualities.     A 
great  administrator  in  political  or  industrial  affairs  can  dis- 
pense with  everything  else  rather  than  with  this,  the  supreme 
quality  of  the  great  organizer. 

3.  The  organizer  must  have  unusual  foresight  and  the 
ability  to  form  a  large  commercial  policy.    This  proposition 


§IIJ  QUALITIES  OF   A  BUSINESS  ORGANIZER  269 

is  to  be  interpreted  relatively  to  the  task  before  the  organizer, 
and  to  the  size  of  the  business.  Modern  industry  anticipates 
demand  far  more  than  did  primitive  industry.  Large 
amounts  of  materials  and  energy  are  embarked  in  directions 
from  which  they  cannot  be  recalled.  With  the  progress 
of  electrical  engineering  it  soon  may  become  possible  to 
recall  at  any  moment  a  cargo  embarked  for  a  distant  port. 
But  no  wireless  telegraphy  is  able  to  recall  the  great  masses 
of  capital  that  are  embarked  on  distant  and  definite  journeys 
in  modern  business.  The  organizer  anticipates  future  de- 
mand, and  prepares  for  it.  The  process  has  been  figuratively 
expressed  somewhat  as  follows:  the  enterpriser  throws  into 
the  crucible  great  quantities  of  material ;  they  melt,  and  an 
industrial  result  is  secured,  but  whether  the  deposit  is 
greater  in  value  than  the  material  is  a  question  that  cannot 
be  answered  for  years.  The  need  of  anticipating  demand 
is  greater  to-day  than  ever  before,  and  this  requires  large 
investments  months  and  even  years  in  advance.  The  losses 
are  proportionally  large  if  there  is  miscalculation  of  demand. 
A  large  commercial  policy  is  one  that  takes  into  account  the 
more  distant  factors,  and  anticipates  the  new  conditions. 
The  rare  ability  to  do  this  is  rightly  called  statemanship  in 
economic  affairs. 

4.  The  organizer  need  not  himself  have  great  wealth,  but 
he  must  have  ability  to  command  financial  resources.  Busi- 
ness to-day  is  done  in  many  cases  with  borrowed  capital. 
Even  a  subscription  to  stock  is  frequently  as  much  in  the 
nature  of  a  loan,  made  in  reliance  on  the  reputation  of 
the  organizer,  as  an  investment  for  profits.  There  are  many 
temporary  needs  that  require  sudden  loans.  The  confidence 
of  investors,  whether  banks,  trust  companies,  individual 
shareholders  or  investors  in  bonds,  must  be  secured  by  the 
organizer.  Good  judgment  of  the  money  market  often  is  as 
vital  as  judgment  of  the  market  for  the  particular  product. 
In  some  of  the  largest  corporate  enterprises  this  quality 
becomes  the  most  essential. 


270 


THE  ENTERPRISER'S  FUNCTION 


[CH.  29 


Scarcity  of 
great  or- 
ganizing 
ability 


The  indus- 
trial leaders 


5.  Organizing  ability  of  the  highest  order  is  rarely  found. 
This  is  almost  a  superfluous  statement  after  the  foregoing. 
According  to  the  theory  of  chances,  such  a  combination  and 
balancing  of  qualities  is  likely  to  occur  in  very  few  cases. 
Even  where  it  exists,  it  may  not  be  discovered  or  devel- 
oped. The  man  may  not  find  his  opportunity,  nor  the  task 
the  man.  There  are  many  misfits  in  the  world.  On  the 
occasion  of  the  visit  of  Prince  Henry  of  Prussia  to  America, 
in  1902,  he  was  entertained  at  luncheon  in  New  York  with 
one  hundred  of  the  leaders  in  invention,  finance,  and  in- 
dustry, wherein  have  been  the  most  characteristic  achieve- 
ments of  America.  In  jocular  reference  to  the  French 
Academy,  whose  members  are  the  forty  most  noted  literary 
men  of  France,  the  newspapers  called  this  the  meeting  of 
America's  one  hundred  immortals.  There  were  J.  P.  Mor- 
gan^  ^  grea^  financier;  Vanderbilt,  Hill,  and  Harriman, 
the  railroad  kings;  Carnegie,  the  iron  magnate;  Irving 
Scott,  "  the  man  who  built  the  Oregon  "—nearly  all  the 
company  deserving  a  place  at  the  table  mainly  by  reason  of 
excellence  as  business  organizers.  Such  a  gathering  has  a 
dramatic  interest  as  presenting  the  greatest  leaders  of  in- 
dustry, but  about  other  tables  might  be  gathered  thousands 
of  other  less  notable  figures  worthy  to  be  accounted  captains 
of  industry  in  their  several  fields.  One  may  well  ask,  How 
did  they  come  into  the  important  places  they  occupy  ? 


Various 
roads  to  in- 
dustrial 
leadership 


§  IH.      THE    SELECTION   OP    ABILITY 

1.  The  men  actually  in  control  of  industry  have  been  se- 
lected in  manifold  ways.  Skill  develops  a  small  industry 
into  a  large  one.  A  small  factory  owner  gradually  adds 
machine  to  machine,  building  to  building,  till  he  finds  him- 
self at  the  head  of  a  great  industry.  Or  an  employee  de- 
velops ability  and  becomes  an  employer.  Who  does  not  know 
of  some  one  who,  as  a  small  boy,  went  into  a  store  to  do 
chores,  worked  up  to  a  clerkship  and,  enlisting  the  confidence 


§IH]  THE  SELECTION  OF  ABILITY  271 

of  men  of  wealth,  was  enabled  to  establish  a  business  of  his 
own  and  become  an  employer?  Others  have  won  promotion 
from  the  ranks  to  the  head  of  a  large  industry  in  which  they 
secured  at  last  a  controlling  interest.  Employees  that  have 
proved  their  ability  may  be  selected  by  the  directors  of  a 
stock  company.  Men  that  have  worked  their  way  up  from 
the  ranks  may  bequeath  their  business  positions  to  their  sons 
and  grandsons,  as  in  the  case  of  the  Vanderbilts  and  the 
Goulds.  And  finally,  but  rarely,  there  may  be  selection  by 
fellow-workmen  in  the  case  of  cooperative  business. 

2.  There  is  a  constant  selective  process:  dropping  out  successes   \ 
the  weak  and  advancing  the  efficient  organizer.     There  is,  ^evidence  J 
to  be  sure,   an  element  of  chance  in  this  selection.     The 

process  in  general  is  a  rude  one.  Accidents  and  unforeseen 
changes,  industrial  crises,  failure  of  health  at  a  critical 
moment,  fraud  and  crime,  may  defeat  men  of  ability  and 
they  may  never  regain  their  foothold.  Lack  of  experience 
may  lead  to  disaster  a  naturally  able  but  youthful  heir,  too 
suddenly  burdened  with  the  responsibilities  of  a  fortune.  On 
the  other  hand,  men  of  limited  ability  may  inherit  fortunes 
and  preserve  them  by  caution,  without  enterprise.  It  is  not 
always  true,  even  in  America,  that  "It  is  but  three  genera- 
tions from  shirt-sleeves  to  shirt-sleeves,"  although  many 
fortunes  slip  away  from  the  sons  of  rich  fathers.  In  general, 
success  in  retaining  the  control  of  a  business  is  an  evidence  of 
considerable  ability.  By  loss  of  fortune  unwisely  risked, 
through  unforeseen  changes  in  methods,  and  after  manifold 
blunders,  the  less  capable  drop  out.  Thus,  by  the  ceaseless^ 
working  of  competition,  the  higher  places  are  taken  by  those 
most  capable  of  filling  them,  and  the  efficiency  both  of  the) 
employers  and  of  the  workmen  is  increased. 

3.  In  the  various  kinds  of  business  organization  the  mer-  various 
its  of  men  and  of  methods  are  tested.     The  independent  %£*££„. 
producer  working  entirely  alone,  directing  his  own  industry,   ganizatioa 
is  analogous  to  the  animal  organism  of  a  single  cell.     More 
complex  is  the  family  partnership  found  often  in  early  stages 


272  THE  ENTERPRISER'S  FUNCTION  [CH.  29 

of  industry  but  more  rarely  now,  where  the  father  directs 
the  work  of  his  children  and  all  share  in  common.  The 
simplest  form  of  the  wage  system  is  the  single  employer  with 
a  few  assistants.  When  the  employer  is  in  danger  of  losing 
valuable  assistants,  he  sometimes  gives  them  a  share  in  the 
business.  In  the  ordinary  partnership,  two  or  more  men 
divide  the  ownership  and  duties,  agreeing  as  to  the  division 
of  control.  Cooperation  among  workmen,  though  rare,  gives 
an  unusual  opportunity  for  the  discovery  of  special  talent. 
The  dominant  form  of  organization  to-day  is  that  of  the 
stock  company,  or  corporation,  the  ownership  of  which  is 
divided  among  the  holders  of  shares  of  stock,  or  of  certifi- 
cates of  membership. 

Many  This  variety  of  organization  affords  opportunity  for  a 

tw°-f old  test :  that  of  the  ability  of  men  and  of  the  merits, 
in  varying  circumstances,  of  the  different  forms  of  or- 
ganization. Methods  of  organization  are  constantly  tested 
by  their  results.  Men  having  money  to  invest  are  asking 
whether  they  would  be  better  off  to  go  into  business  by 
themselves,  or  to  join  with  a  partner,  or  to  buy  stock  in  some 
large  corporation.  Each  of  these  forms  of  organization  has 
its  peculiar  advantages.  A  stock  company  can  better  enlist 
large  amounts  of  capital,  while  the  individual  employer  is 
generally  more  free  from  dictation  and  can  adapt  his  busi- 
ness more  quickly  to  changing  conditions.  At  the  same  time 
this  variety  of  organization  offers  better  opportunities  for 
managing  ability  to  show  its  metal.  On  the  watch  towers 
of  industry  are  many  observers  sweeping  the  horizon  for  the 
appearance  of  men  of  business  talent.  Some  characters 
develop  better  under  direction;  others  prove  that  nowhere 
does  native  ability  count  for  more,  and  mere  book-schooling 
for  less,  than  in  business  administration.  There  is  some 
ground  for  the  belief  that  a  college  education  does  not  in- 
crease executive  capacity  in  business.  Such  ability  often 
seems  to  be  a  freak  of  nature  and  a  product  of  practical 
experience,  rather  than  the  result  of  college  training. 


CHAPTER  30-^^ 

COST  OF  PRODUCTION 

§  I.      COST  OF  PRODUCTION  FROM  THE  ENTERPRISER 's  POINT  OF 

VIEW 

1.  The  task  of  the  enterpriser  is  to  get  together  the  es-   Theenter- 
sential  factors  to  secure  valuable  products.    The  enterpriser  Pnser'8COSt 
must  first  decide  what  product  he  will  endeavor  to  secure,  and 

the  kind,  the  place,  the  time,  the  quantity,  and  the  quality. 
He  must  then  select  in  the  right  proportion  the  materials, 
labor,  plant,  and  machinery  necessary  for  that  product.  He 
must  purchase  these  factors  in  the  market  at  the  lowest  price 
he  can,  unite  them  and  sell  the  product  to  recover  the  ex- 
penses in  the  selling  price.  A  thousand  items  enter  into  the 
cost  and  perhaps  a  single  product  emerges.  What  the  busi- 
ness man  thus  pays  out,  expressed  in  money  form,  are  the 
costs  that  are  here  to  be  considered. 

2.  The  term  cost  of  production  is  used  in  several  senses,  several 
the  chief  of  which  are  money  cost,  psychic  cost,  and  alterna- 

tive  cost.  The  ambiguity  of  this  term  is  a  source  of  much 
confusion.  Psychic  cost  is  the  pain,  fatigue,  irksomeness  o 
labor.  This  is  not  definitely  measured  except  at  rare  points. 
When  the  pain  of  work  more  than  offsets  the  value  of  the 
product,  the  worker  who  is  free  to  determine  the  length  of 
his  own  working-day,  stops.  At  that  point  the  psychic  cost 
and  the  utility  of  the  marginal  unit  are  almost  equal  in 
intensity— the  one  as  a  positive,  the  other  as  a  negative 
quantity.  But  the  value  of  the  product  as  a  whole  cannot  be 
related  to  the  psychic  cost  or  sacrifice,  and  therefore  it  cannot 
is  273 


274 


COST  OF  PRODUCTION 


[CH.  so 


The  cost  of 


serve  as  a  measure  of  cost  in  every-day  business.  Alternative 
cost  is  any  good  or  gratification  that  must  be  given  up  when 
any  other  good  is  chosen.  One  may  stay  at  home  and  read 
a  book  or  go  on  a  picnic  ;  the  pleasure  of  reading  the  book 
will  cost  the  pleasure  of  the  picnic.  A  good  dress  may 
cost  a  happy  vacation  that  must  be  given  up  for  it.  In  this 
sense,  each  thing  is  a  cost  of  every  other  thing  that  might 
be  chosen  in  the  place  of  it.  Alternative  cost  is  therefore 
manifold  and  indefinite.  The  thought  is  significant  at  the 
moment  of  a  choice,  but  it  is  not  constantly  measurable  for 
practical  purposes.  The  money  cost  is  the  practical  cost 
generally  implied  in  the  term  cost  of  production.  It  ex- 
presses not  the  pain  of  the  laborer  in  doing  the  work,  not 
the  sacrifice  of  the  owner  of  the  capital  in  saving  the  money, 
but  merely  the  sum  of  money  paid  out  by  the  producer. 
There  is  frequent  confusion  of  these  ideas  in  economic 
discussion,  few  even  of  the  leading  economists  of  the  nine- 
teenth century  having  quite  escaped  it. 

3.  The  enterpriser,  looking  upon  the  cost  of  most  of  the 
I  ac^ors  as  fixed,  seeks  to  combine  them  as  economically  as 
possible.  Whether  the  enterpriser  is  running  a  factory  or 
a  farm,  is  engaged  in  a  retail  or  a  wholesale  store,  is  con- 
ducting a  school,  or  a  railroad,  he  has  to  solve  much  the 
same  problem.  By  close  attention,  good  judgment,  skilful 
bargaining,  he  may  be  able  to  buy  slightly  cheaper  than  his 
competitors,  and  thus  have  an  advantage  over  them  at  the 
outset.  When  he  dees  this,  it  is  usually  by  searching  out  a 
better  market  in  which  to  buy,  buying  at  a  better  time,  and 
judging  better  than  his  competitors  the  quality  of  goods. 
If,  in  a  given  market  at  a  given  time,  goods  are  sold  to  one 
more  cheaply  than  to  others,  it  is  an  act  of  generosity.  Even 
the  best  buyers  pay  nearly  the  prevailing  market  price  for 
agents.  The  most  successful  enterprisers  are  not  found  to  be 
those  paying  lower  wages  or  lower  ground-rent  than  their 
competitors.  It  must  not  be  forgotten  that  the  main  forces 
fixing  the  prices  of  agents  are  impersonal,  and  can  be  only 


§1]  ENTERPRISER'S  COSTS  275 

slightly  modified  in  most  cases  by  a  particular  buyer.  He 
looks  therefore  upon  the  cost  of  the  elements  as  an  ultimate 
fact  which  he  can  change  little,  if  at  all,  and  he  shows  his 
judgment  chiefly  in  the  selection  of  quality.  Cost  determines 
and  limits  the  extent  of  his  business  and  determines  the  price 
at  which  he  sells. 

4.  The  right  proportioning  and  skilful  substitution  of  The  right 
the  factors  is  a  delicate  technical  task  for  the  enterpriser,  f^ofthe" 
Good  buying  and  good  selling  must  precede  and  follow  the  factors 
central  part  of  the  enterpriser's  task,  that  is,  the  combining 

of  the  various  factors.  Each  factor  is  applied,  subject  to 
diminishing  returns,  up  to  a  point  where  its  addition  will 
not  secure  the  value  attributed  to  it^in  its  cost.  The  enter- 
priser is  constantly  studying  the  question  whether  the  appli- 
cation of  another  unit  of  any  one  factor  at  the  price  will 
add  to  the  value  of  the  product  as  much  or  more  than  the 
cost.  This  calculation  is  made  for  every  one  of  the  minor 
factors  entering  into  the  business,  and  for  the  business  as  a 
whole.  The  proper  proportion  varies  at  different  prices,  or 
costs.  If  wages  rise,  "it  pays"  to  get  machinery;  if  wages 
fall,  it-pays  to  let  the  machinery  deteriorate  and  to  do  more 
by  hand-labor.  Likewise  there  is  constant  substitution  of  the 
various  materials.  The  right  proportions  change  constantly 
with  inventions.  A  model  factory  is  so  proportioned  that  the 
buildings  hold  the  right  number  of  machines,  with  the  right 
amount  of  space  for  the  workmen,  and  the  right  amount  of 
power.  If  there  is  more  of  a  single  factor  than  the  ideal 
proportion,  it  is  an  unnecessary  cost.  Even  the  model  fac- 
tory begins  to  be  out  of  date  almost  as  soon  as  the  walls  are 
dry,  and  the  latest  method  is  to  build  as  nearly  as  pos- 
sible on  the  unit  system,  so  that  new  parts  may  be  added 
without  the  loss  of  harmony  and  proportion. 

5.  The  enterpriser's  costs  determine  the  lowest  price  at  Pressure  of 
which  he  can  continue  to  sell,  but  if  successful  he  may  have  JJ^  c°~tat 
a  wide  margin  of  profits.    New  factories  are  constantly  aris-  certain 
ing  with   new   and  better  adjustments.     In   industries   of  * 


276 


COST   OF   PRODUCTION 


LCH.  30 


The  enter- 
priser in 
contact 
with  costs 


competing  products,  also,  the  processes  are  changing.  Hence 
there  is  always  a  pressure  of  competition  on  some  enter- 
prisers who  constantly  complain  that  they  must  sell  below 
the  cost  of  production.  The  organizers  of  a  trust  always 
declare,  some  no  doubt  truly,  that  they  have  been  selling 
below  the  cost  of  production.  Business  men  say  that  compe- 
tition is  destructive,  and  it  certainly  does  destroy  the  less 
favorably  situated  enterprises.  Each  enterpriser's  price  is 
the  highest  he  can  get  in  the  market  for  his  product;  it 
may  far  exceed  his  costs;  it  may  even  fall  below  them,  but 
only  temporarily,  for  if  sales  continue  to  encroach  on  cap- 
ital, the  sheriff  soon  closes  the  doors.  Successful  competitors 
are  constantly  pressing  upon  the  marginal  enterpriser,  fix- 
ing a  price  that  leaves  themselves  a  profit,  but  is  below  his 
cost.  Even  the  most  successful  enterpriser  comes  into  con- 
tact with  cost,  and  seems  to  be  compelled  by  it.  He  reaches 
out  for  trade,  and  sells  some  (not  all)  goods  at  a  price  which 
leaves  him  no  profit.  He  enlarges  his  factory  and  ships 
goods  farther,  paying  the  freight,  which  means  a  lower  price 
at  the  factory.  The  expanding  business,  therefore,  comes  at 
length  to  the  point  where  it  cannot  go  farther  at  the  prevail- 
ing prices.  Hence  the  business  man's  view  of  the  costs  is 
that  they  determine  value.  It  is  true  in  the  sense  that 
the  supply  of  a  particular  product  in  any  market  is  at  last 
limited  by  cost  of  marginal  producers  or  of  marginal  por- 
tions of  supply.  But  it  is  not  true  of  all  the  units  of  product 
that  costs  determine,  or  equal,  market  price.  There  is  a  mar- 
gin above  costs  to  the  successful  enterpriser  on  a  large 
portion  of  his  output.  The  margin  may  be  narrow  or  wide, 
according  to  the  business.  The  margin  is  "  profit,"  or  the 
gain  of  the  enterpriser. 


§  II.      COST  OP  PRODUCTION  FROM  THE  ECONOMIST 's  STANDPOINT 

1.     The  economist  should  view  money  cost  as  an  interme- 
diate and  not  as  an  ultimate  explanation  of  value.     The 


§11]  PROM  THE  ECONOMIST'S  STANDPOINT  277 

value  of  all  things  must  be  traced  back  to  gratification,  to  the  Money  cost 
relation  of  goods  with  psychic  income.  This  being  true,  njV^e 
the  value  of  the  factors  which  the  enterpriser  uses  must  be  explanation 
derived  from  the  value  of  the  products,  and  not  the  reverse.  of  value 
This  does  not  mean  that  the  business  man  is  deceived  into 
the  belief  that  he  has  in  cost  of  production  a  final  explana- 
tion of  value.  He  simply  is  not  interested  in  that  question. 
He  knows  that  there  are  many  influences  determining  the 
cost  of  the  factors  he  buys,  but  they  are  distant;  he  cannot 
influence  them,  and  in  the  single  stage  of  his  production 
they  seem  to  fix  the  price.  In  some  purchases,  and  on  the 
stock  exchange,  a  marvelous  recognition  and  analysis  of  the 
most  distant  influences  is  necessary ; -but  in  general  a  super- 
ficial view  of  value  is  taken  in  business;  it  does  not  pay  to 
do  other.  The  logical  treatment,  however,  must  go  deeper 
into  the  question  and  trace  the  cost  of  agents  back  to  the 
ultimate  cause  of  value,  that  is,  to  want-gratifying  power. 
To  say  that  the  price  of  a  product  is  determined  by  the 
money  cost,  or  price,  of  the  factors  is  simply  to  postpone 
the  answer  to  the  question  of  value;  one  has  still  to  ask, 
What  determines  the  money  cost,  or  price,  of  those  factors 
themselves  ? 

2.     The  demand  for  any  factor  entering  into  products  is  The  cost  of 
reflected,  in  an  increased  price,  to  its  cost  in  all  competing  JJjJJ^18 
products.     Figuratively   speaking,   products   compete   with  their  mar- 
each  other  for  the  factors  that  enter  into  them.    According  ^^^y 
to  location,  quality  of  the  soil,  and  improvements,  a  certain  tiveuses 
area  of  land  has  various  rival  uses.     These  uses  bid  for  the 
land,  or  put  in  an  economic  claim  for  it.     Products  of  a 
higher  value  outbid  and  exclude  those  of  a  lower.     If  fine 
wine  can  be  raised  on  a  piece  of  land,  potatoes  ordinarily 
will  not  be  planted  in  it.    But  if  there  is  such  a  supply  of 
that  quality  of  land  that  it  continues  to  be  used  side  by  side 
for  both  products,  it  will  have  the  same  value  and  yield  the 
same  rental  in  both  uses.     The  least  utility  yielded  by  any 
portion   of   the   supply   fixes   the  value   of   all   the   units. 


278 


COST   OF   PRODUCTION 


[CH.  30 


A  single 
source  of  a 
single  pro- 
duct 


One  source 
of  several 
products 


Machines  are  usually  made  for  some  product  determined  in 
advance,  but  often  they  are  only  partially  specialized  and 
within  limits  they  can  be  adapted.  Sewing-machine  facto- 
ries were  readily  turned  to  the  making  of  bicycles  at  the 
time  of  greatest  demand,  and  bicycle  factories  later  were 
used  for  the  making  of  automobiles.  Thus,  in  general,  machin- 
ery is  used  for  the  product  to  which  it  contributes  the  most 
value.  Any  enterpriser  seeking  it  for  any  other  use  finds  its 
"cost"  affected  by  its  various  alternative  uses.  The  same 
is  true  of  all  the  materials  and  of  all  the  grades  of  labor 
entering  into  products.  The  enterpriser's  cost  is  therefore 
the  reflection  of  the  want-gratifying  power  of  the  productive 
agent  in  all  its  other  uses  as  well  as  in  the  particular  product 
he  desires.  To  the  enterpriser,  cost  seems  the  cause  of  the 
value  of  a  product.  To  the  economist  it  should  be  clear  that 
the  utility  found  in  the  various  products  is  the  basis  of  value 
in  the  factors,  i.  e.,  of  the  costs. 

3.  The  genealogy  of  value  may  thus  be  traced  through  the 
various  intermediate  products  to  consumption  goods.  A 
single  product  having  a  single  source  of  supply  shows  most 
clearly  the  reflection  of  value  directly  from  the  product. 
The  discovery  of  a  mineral  spring  or  of  a  good  quality  of 
building-stone  on  worthless  land,  will  cause  a  value  to  at- 
tach at  once  to  the  source  of  supply.  When  a  great  singer 
like  Adelina  Patti  commands  several  thousand  dollars  for 
each  appearance  in  concert,  the  source  is  the  magical  throat 
of  the  singer,  and  the  salary  reflects  the  utility  of  the  music 
in  the  minds  of  delighted  hearers. 

When  the  one  source  of  supply  yields  several  different 
kinds  of  products  there  is  just  one  new  condition  which  con- 
fuses the  thought  and  suggests  the  error  that  value  begins 
in  the  source  (with  costs  therefore)  and  not  in  the  product. 
Looking  at  the  products  severally,  no  one  of  them  explains 
the  value  of  the  source,  and,  on  the  contrary,  each  one  is  seen 
to  have  a  value  independent  of  the  particular  use  to  which  it 
is  put.  To  make  the  illustration  most  simple :  a  savage  finds 


§11]  FROM  THE   ECONOMIST'S   STANDPOINT  279 

in  a  wreck  on  the  coast  a  number  of  bars  of  iron.     His 
fellows  wish  them  for  various  purposes :  to  make  arrow  heads, 

Source 


Product- 


I.  A  single  Product 
2.   Several  Products  from  one  Source 

spears,  knives,  hatchets,  hoes,  ornaments,  nails,  needles,  etc. 
Value  is  in  this  case  derived  in  part,  through  the  source, 
from  the  alternate  uses.  Taken  jointly  and  considered  as 
one  sum,  the  value  of  the  various  products  accounts  as  com- 
pletely and  exclusively  for  the  value  of  the  source  as  if  they 
were  merged  into  one  product.  The  source  (S)  is  distributed 
to  each  of  the  products  in  accordance  with  their  marginal 
utility,  and  therefore  the  value  of  the  various  products 
from  any  source  of  supply  constantly  tends  to  equality. 
Any  unit  of  product  sought  for  any  purpose  must  be  paid 
for  according  to  a  marginal  utility  determined  in  all  the  . 
applications.  The  genesis  of  the  value  is  in  the  utility  of  the 
product;  the  value  of  the  source  is  derived. 

In  actual  life  the  problem  is  far  more  complex,  and  yet,   complex 
through  its  settlement  runs  just  the  same  principle.     There  ^JJJ1^ 
is  constant  bidding  for  materials,  and  through  their  price  mediate 
the   claims   of   rival   products   are   adjusted.      A   point   is  pr(X 
reached  where  it  does  not  pay  to  use  any  more  of  an  agent 
in  a  certain  industry;  the  production  of  another  unit  results 


280 


COST   OF  PRODUCTION 


[CH.  30 


The  enter- 
priser the 
medium  of 
price  move- 
ments 


in  a  loss.  There  is  a  most  complex  relation  among  many 
different  industries  using  the  same  factors,  the  value  of 
a  unit  of  product  (at  a)  being  reflected  up  to  the  source,  and 
through  successive  links  to  the  most  distant  product  (z).  The 


a        b          c  ct  of  ^  z 

3.  Complex  Relations  Through  intermediate  Products 

effect  of  this  is  to  reduce  the  sale  (of  z)  and  correspondingly 
the  use  made  of  the  agent  in  question.  A  higher  price  of 
leather,  due  to  the  increased  use  of  shoes,  raises  the  value 
of  hides  and  cattle  (this  increasing  the  extent  of  cattle 
raising)  and  raises  thus  the  cost  of  carriage-trimmings, 
pocket-books,  foot-balls,  leather  belts,  and  every  other  leather 
product.  As  the  price  rises,  substitutes  for  leather,  and  im- 
itations of  it,  are  used  for  such  of  the  products  as  cannot  bear 
the  increased  cost  of  leather. 

4.  The  enterpriser  does  not  fix  the  value  of  products  or  of 
agents,  but  is  the  medium  through  which  consumers  express 
their  estimates.  The  enterpriser  who  anticipates  aright  and 
satisfies  the  public  taste  is  the  good  medium.  He  readily 
transmits  and  accurately  focuses  the  rays  of  public  judg- 
ment. One  that  misjudges  is  a  poor  medium.  The  enter- 
priser is  himself  the  servant  of  costs.  Laborers  sometimes 


§11]  FEOM  THE  ECONOMIST'S  STANDPOINT  281 

assume  that  the  employer  can  dictate  wages,   prices,  and 
markets,  can  rule  things  with  a  lordly  hand.     With  rare 
exceptions  the  ultimate  control  in  these  matters  by  business 
men  is  very  slight.     I«  the  main  the  enterpriser  masters 
the  situation  only  by  bowing  to  it,  just  as  the  scientist  and  the 
engineer  gain  mastery  over  nature  because  they  know  when  Costs  are  an 
to  bend  and  how  to  obey.    The  consumer,  by  deciding  to  buy  ^ cSs^m- 
this  or  that  product,  sets  in  motion  waves  of  value.     The  ers'esti- 
consumers  of  products   are  the  true  purchasers  of  labor, 
materials,  and  uses  of  agents.    The  enterpriser  must  conform 
closely  to  cost,  to  the  price  prevailing  for  the  moment,  or  his 
competitors  in  this  day  of  narrow  margins  will  seize  the 
opportunity.  The  enterpriser  is  me'rely  the  distributor  or  1 
equalizer  of  cost  among  all  the  different  products  for  which  I 
different  agents  can  be  used.     If  he  acts  efficiently,  profits  \ 
arise. 


CHAPTER  31 
THE   LAW   OF   PROFITS 


Broadest 
use  of  the 
term  profit 


Used  of 
gross  gains 
on  sales 


§  I.       MEANING   OF   TERMS 

1.  The  term  profit  is  popularly  used  as  any  gain  or  ad- 
vantage secured  by  any  means  in  business.    The  terms  used 
in  economics,  being  taken  from  popular  language,  vary  in 
meaning  according  to  the  context.     It  is  necessary  to  clear 
thinking  to  reject  some  words  entirely  and  when  using  others 
to  define  them  more  .strictly.     The  broad  usage  of  the  term 
profits  just  noted  includes  every  kind  of  return  to  industry : 
such  as  interest  on  capital,  and  wages  or  services  of  the  man 
owning  the  industry.    Precise  thinking  requires  its  use  in  a 
much  narrower  sense. 

2.  A  common  meaning  of  profits  in  retail  business  is  the 
gross  gain  on  a  given  sale.    Buying  an  article  for  one  dollar 
and  selling  it  for  two  dollars,  is  said  by  the  merchant  to 
be  selling  at  one  hundred  per  cent,  profit,  jocularly  called, 
"  The  Dutchman's  one  per  cent."     The  cost  price  is  con- 
sidered to  be  that  paid  to  the  manufacturer  or  wholesaler. 
In  different  lines  of  goods  there  is  added  regularly  to  this 
cost  twenty,  thirty,  or  fifty  per  cent.,  as  the  case  may  be,  as 
the  merchant's  profit  on  the  sale.    This  is  of  course  a  gross 
profit,  and  not  net,  or  true  profit.     It  leaves  out  of  account 
rent,  interest  on  capital,  clerk  hire,  freight,  and  many  other 
minor  items  that  enter  into  the  cost  of  running  a  store.    It 
often  happens  that  the  Dutchman's  way  of  reckoning  is 
nearer  the  truth,  and  that  the  gross  profit  of  one  hundred 
per  cent,  proves  at  the  end  of  the  year  to  be  only  a  net 

282 


§1]  MEANING   OP   TERMS  283 

profit  of  one  per  cent.  This  evidently  is  a  loose  meaning, 
impossible  in  the  discussion  of  theoretical  questions.  This 
meaning  is  sometimes  developed,  making  profits  the  sum  of 
all  the  gross  profits  on  separate  sales  within  a  year,  or  the 
difference  between  the  wholesale  and  retail  prices  of  goods 
sold  within  the  year. 

Another  meaning  given  to  the  term  is  gross  profit  (as 
above)  compared  with  the  capital  invested.  The  "profit" 
in  this  case  varies  partly  with  the  rate  of  the  turnover. 
To  illustrate:  if  the  amount  invested  in  a  printing-office 
is  $100,000,  and  the  annual  business  done  is  $300,000,  the 
capital  is  said  to  be  turned  over  three  times;  if  the  gross 
profits  on  sales  averaged  twenty  pe,r  cent.,  they  would  be 
sixty  per  cent,  on  the  investment;  but,  if  the  capital  had 
been  turned  over  four  times,  the  gross  profit  would  have  been 
eighty  per  cent,  on  the  investment. 

3.  Another  meaning  of  profits  is  the  annual  net  gain  Of  net  gains 
of  the  business,  as  compared  with  the  average  investment  of  "JJ^g"^ 
capital.    This  is  a  long  step  toward  greater  definiteness.    If  invested 
at  the  end  of  a  year  it  were  found  that  after  paying  all  ^P1**1 
outside    expenses    there    were    $10,000    to    set    aside,    this 

would  be  accounted  a  profit  of  ten  per  cent,  on  $100,000 
invested.  But  confusion  still  reigns  because  of  wide  varia- 
tion in  the  methods  of  estimating  costs  before  fixing  net 
profits.  In  one  case  the  enterpriser  rents  lands  and  build- 
ings, in  another  he  owns  them ;  in  one  case  he  has  borrowed 
money  and  counts  interest  as  a  cost,  in  another  he  is  free 
from  debt;  in  one  case  he  counts  as  a  part  of  cost  an  esti- 
mated fair  salary  for  himself  and  his  partners,  in  another 
(usually  in  a  small  business)  no  such  allowance  is  made 
Such  a  variation  in  business  usage  is  most  perplexing.  In 
all  these  cases  one  must  have  the  exact  conditions  in  mind 
before  it  is  possible  to  make  any  comparisons  and  draw  any 
conclusions  as  to  the  relative  profits  of  different  industries,  f^ 

4.  In  the  narrower  and  exacter  sense  profits  are  the  net  Profits  in 
gain  of  the  enterpriser  after  counting  the  rent  of  material  ™™™IC 


284  THE  LAW  OF   PROFITS  [CH.  31 

agents  and  contract  wages  of  employees  at  the  prevailing 
rates.     Into  the  practical  problem  of  cost  and  profit  many 
factors  enter,  and  the  theoretical  problem  is  to  determine 
just  how  much  ought  to  be  attributed  to  each.     In  a  large 
business  usually  the  practical  bookkeeping  problem  is  not 
unlike  that  of  economic  analysis.     A  stock  company  counts 
as  cost,  as  a  part  of  fixed  charges,  interest  on  capital  bor- 
rowed either  from  banks  or  bondholders.     Its  managers  are 
paid  salaries,  counted  as  a  part  of  cost.     The  net  balance,, 
after  deducting  these  and   all   other  expenses,   is   counted 
profits  and  paid  in  dividends  to  stock-holders.    The  economic 
student  is  not  attempting  to  get  a  theory  of  profits  that  is  in 
contrast  with  practice.    Bather,  he  is  trying  to  analyze  profits 
generally,  just  as  they  are  analyzed  in  the  few  cases  where 
^  the  books  are  properly  kept.    In  economic  theory,  therefore, 
\  profits  are  the  part  of  the  gain  of  any  business  that  is  logi- 
/  cally  attributable  to  fortunate  investment  and  good  man- 
(  agement;  profits  are  the  income  attributable  to  the  enter- 
Vpriser's  services. 

5.  Typical  economic  profits  are  thus  a  species  of  wages 
but  are  marked  l)y  peculiar  features.  In  some  of  the  older 
treatises  on  political  economy,  profits  are  treated  merely  as 
a  combination  of  "wages  of  management,"  and  of  interest 
on  capital  invested.  A  man  hired  at  a  fixed  sum  to  manage 
a  business  is  receiving  simply  contract  wages.  Economic 
profits  are  not  contract  wages,  not  being  paid  by  agreement, 
but  being  yielded  impersonally  by  the  industry.  Profits  are, 
however,  economic  wages  or  the  earnings  of  services.  As 
business  has  developed,  it  has  been  seen  that  the  enterpriser's 
|  work  has  its  peculiar  character  and  deserves  special  atten- 
I  tion.  The  old  English  word  "  enterpriser, "  used  of  the 
| ' '  adventurer  ' '  who  embarked  in  foreign  trade,  may  fittingly 
apply  to  the  organizer  and  director  of  business  to-day. 
Foreign  trade  then,  more  often  than  now,  was  most  uncer- 
tain, and  there  were  many  chances  that  the  ship  would  be 
lost,  or  the  venture  prove  a  losing  one.  In  the  simplest 


§Hj  THE  ENTERPRISER'S  SERVICES  REVIEWED  285 

business  to-day  there  is  this  element  of  enterprise,  or  under- 
taking,   combined    with   ordinary    capital    and    labor.      As 
industry  develops,  this  special  service  stands  out  more  clearly. 
In  the  corner-grocer  and  in  the  manager  of  the  little  news- 
stand, the  elements  of  enterprise  and  labor  are  not  apart.    In 
the  large  wholesale  house,  the  enterpriser  is  seen  to  be  not 
merely  an  abstractly  thinkable  function,  but  a  separate  and 
concrete  person.     The  typical  enterpriser  is  the  man  who\ 
gives  his  time  and  energies  to  the  launching  and  guiding  oy 
business. 


§n. 

1.  The  enterpriser  guarantees  to  the  capitalist-lender  a  Theenter- 
fixed  return.  Agents  will  yield  the  highest  economic  rent  gjj^fuiuse 
of  which  they  are  capable  only  in  the  hands  of  those  who  of  capital 
can  use  them  with  exceptional  skill.  Owners  of  capital  who 
for.  any  reason,  such  as  youth,  inexperience,  ill  health,  inca- 
pacity, or  conflicting  duties,  are  not  able  to  make  agents  yield 
the  average  rent,  seek  out,  or  are  sought  out  by,  those  who 
in  general  can  make  the  agents  yield  more  than  the  average. 
The  interest  contract  between  them  is  one  of  mutual  advan- 
tage, in  that  the  enterpriser  pays  a  definite  sum  to  the 
investor  unable  himself  to  apply  his  productive*  agents.  Im- 
mense sums  of  capital  are  now  put  into  the  hands  of  small 
enterprisers,  such  as  Western  farmers  improving  their  lands, 
builders  of  city  homes  and  business  blocks,  and  small  manu- 
facturers. But  stocks  and  bonds  of  corporations  give  a  wide 
variety  of  investments  which  shade  off  from  the  safer  or 
capitalistic  type,  to  the  more  uncertain,  or  enterpriser's 
type.  First-mortgage  bonds,  being  a  first  claim  on  the  income 
and  property,  have  the  highest  security  and  yield  generally 
the  lowest  interest.  Even  national  bonds  are  not  absolutely 
safe,  and  for  that  reason  as  well  as  because  of  their  fluctua- 
tion in  price,  even  their  purchase  has  something  of  the  nature 
of  an  enterprise.  Stocks  are  the  enterpriser's  type  of  invest- 


286 


THE  LAW  OF  PROFITS 


[CH.  si 


The  enter- 
priser's  in- 
surance of 
the  lender's 
capital 


The  enter- 
priser's 
insurance 
of  the 
laborer's 
production 


ment,  the  dividends  being  more  uncertain,  but  giving  the 
chance  of  a  higher  return  than  the  average.  It  is  because 
some  stand  ready  to  assume  the  risk  of  making  goods  yield 
average  returns  or  more,  that  others  can  sit  and  enjoy  a 
fixed  income  with  little  effort  and  in  comparative  security. 

2.  The  enterpriser  gives  up  the  certain  income   to   be 
got  by  lending  his  own  capital,  and,  becoming  a  borrower, 
offers  his  capital  as  insurance  to  the  lender.    Every  business 
has  an  element  of  uncertainty  in  it,  and  some  one  must  meet 
the  risk.     A  man  with  marked  ability  as  an  organizer  of 
industry  is  rarely  found  long  without  capital  of  his  own. 
But  even  a  penniless  man  who  can  gain  the  confidence  of 
investors  is  able  to  get  backing  and  to  secure  the  necessary 
funds  to  engage  in  business.     The  lenders  in  such  a  case, 
however,  run  a  greater  risk  than  when  the  enterpriser  is  a 
man  of  some  means,  and  they  therefore  ask  a  higher  rate  of 
interest  than  if  they  were  loaning  to  a  wealthy  man  or  to 
a  wealthy  company.     They  are   in  part  the   enterprisers. 
When,  as  usually,  the  enterpriser  invests  some  of  his  own 
capital,  it  is  a  guarantee  of  his  good  faith,  a  sort  of  insurance 
reserve  to  protect  the  lender  from  loss.     The  first  loss  falls 
on  the  enterpriser,  and  the  chance  of  loss  to  the  lender  is  in 
large  part,  though  not  entirely,  eliminated.     It  is  charac- 
teristic of  modern  loans  that  the  borrower  may  be  rich,  not 
poor,— often  richer  than  the  lender.     The  mortgage  on  real 
estate  and  the  creditor's  claim  on  a  merchant's  property 
usually  give  security  of  far  greater  value  than  the  loan. 

3.  The    enterpriser   gives    to    other   workers    a    definite 
amount  for  services  applied  to  distant  ends.     In  discussing 
the  wage  system  it  was  pointed  out  that  most  labor  at  the 
present  time  is  put  upon  future  goods.     It  is  not  known 
what  they  will  be  worth  a  month  or  a  year  later  when  they 
mature    as    consumption    goods;    their    present    worth    can 
merely  be  estimated.     If  they  prove  to  be  worth  little,  the 
profits  may  be  nothing  or  less  than  nothing.     The  enter- 
priser, however,  buys  the  services  for  ready  money,  embodies 


§iij  THE  ENTERPRISER'S  SERVICES  REVIEWED  287 

them  in  goods,  and  assumes  the  risk;  the  goods  may  sell 
for  more  or  less  than  the  wages.  It  is  sometimes  said  with  a 
certain  irony  that  if  the  enterpriser  assumes  the  risk  he  is 
very  careful  to  pay  so  little  for  labor  that  he  does  not  lose. 
In  this  naive  view  the  enterpriser  is  so  independent  of  the 
market  that  he  can  pay  much  or  little  as  he  pleases.  In  fact 
in  many  cases  he  gains  little,  and  in  many  he  loses  and 
loses  largely. 

4.  The  enterpriser  risks  his  own  services  and  accepts  The  risk  of 
an  indefinite  chance  instead  of  a  definite  amount  for  them.   the  ^to- 
Assuming  the  risk  for  the  right  conduct  of  industry,  he  backs   services 
himself,  expresses  his  faith  in  himself  as  a  manager  who  can 

make  labor  earn  more  than  the  prevailing  wages  and  make 
capital  yield  more  than  the  prevailing  rate  of  interest.  If 
it  were  otherwise,  he  would  loan  what  capital  he  has  instead 
of  borrowing  more;  instead  of  employing  others,  he  would 
himself  seek  employment  in  some  other  industry.  Men  are 
constantly  shifting  from  the  class  of  hired  workers  to  that 
of  enterprisers.  It  is  a  rude  and  often  tragic  process  of 
adjustment  and  selection  that  enables  men  having  ability  as 
enterprisers  to  continue  in  that  work,  and  forces  others  into 
the  class  of  employees. 

5.  The    enterpriser    is    the    economic    buffer;    economic  Theenter- 
forces  are  transmitted  through  him.     In  a  more  primitive  Pns*rthe 
industry   each  man   is   wage-earner,    capitalist,   and   enter-  diary  in 
priser  combined   in  one.     As   industry  develops,   some   of  industry 
the  factors  of  cost  become  distinguishable,   and  relatively 

stable  and  calculable.  A  low  rate  of  interest,  ranging  from 
three  to  four  per  cent.,  can  be  secured  with  practical  cer- 
tainty by  putting  one's  money  into  good  corporation  securi- 
ties, into  the  Savings-bank,  or  into  national  bonds.  Contract 
wages  in  each  class  of  labor  also  are  fixed  by  competition 
at  a  point  where  they  are  a  medium  or  average  of  gains  and 
losses.  The  enterpriser  is  the  most  movable  element.  As 
the  specialized  risk-taker,  he  is  the  spring  or  buffer,  which 
takes  up  and  distributes  the  strain  of  industry.  He  feels 


288 


THE  LAW  OF  PROFITS 


[CH.  31 


f 


Fluctuation 
of  profits 


first  the  influence  of  changing  conditions.  If  the  prices  of 
his  products  fall,  the  first  loss  comes  upon  him,  and  he  avoids 
further  loss  as  best  he  can  by  paying  less  for  materials  and 
labor.  At  such  times  the  wage-earners  look  upon  him  as  their 
evil  genius,  and  usually  blame  him  for  lowering  their  wages, 
not  the  public  for  refusing  to  buy  the  product  at  the  former 
high  prices.  Again,  if  prices  rise,  he  gains  from  the  increased 
value  of  the  stock  in  his  hand  that  has  been  produced  at 
low  cost.  If  the  employer  often  appears  to  be  a  hard  man, 
his  disposition  is  the  result  of  *  *  natural  selection. ' '  He  is 
placed  between  the  powerful,  selfish  forces  of  competition,  and 
his  economic  survival  is  conditioned  on  vigilance,  strength, 
and  self-assertion.  Weak  generosity  cannot  endure. 

6.  Profits  therefore  fluctuate  more  from  industry  to  in- 
dustry and  from  man  to  man  than  do  other  incomes.  As  a 
somewhat  exceptional  case,  small  employers  in  industries  such 
as  baking  and  tailoring,  may  for  long  periods  get  less  for 
their  work  than  their  employees  get  in  wages.  The  pride  in 
being  an  employer  and  occasional  chances  of  greater  gains 
perhaps  explain  the  fact.  The  fluctuations  of  the  market 
may  sweep  away  from  the  enterpriser  not  only  all  his 
"profits,"  but  all  his  accumulated  wealth.  As  a  conse- 
quence, profits  may  be  at  other  times  very  high,  for  men  will 
not  take  the  risk  of  great  losses  unless  there  is  a  chance  of 
large  gains.  While  the  income  of  the  salaried  man  is  oc- 
casionally advanced,  and  then  for  long  periods  remains 
unchanged,  the  profits  of  enterprise  come  in  waves.  In 
seasons  of  prosperity  the  income  of  the  employer  swells  with 
a  dramatic  swiftness  while  rents  and  wages  move  tardily 
upward.  But  for  years  again  the  employer  earns  a  return 
hardly  exceeding  a  low  interest  on  the  capital  invested  in  the 
enterprise,  or  runs  the  business  for  a  time  at  a  loss.  Profits 
of  this  kind  should  not  be  spoken  of  as  a  percentage. 
Greater  or  less,  they  are  the  net  result  attributable  to  the 
enterpriser's  skill,  and  bear  no  fixed  or  calculable  relation 
to  any  capital  investment. 


STATEMENT  OF  THE  LAW  OF  PROFITS  289 


§  III.      STATEMENT  OP  THE  LAW  OF  PROFITS 

1.  Some  apparent  profits  are  due  to  antisocial  or  crim-  Antisocial 
inal  acts.    Cheating,  lying,  breaking  of  contracts,  bribery  of  orPseud°- 
public  officials,  and  many  similar  acts  may  greatly  increase 
individual  incomes.     These  are  not  profits,  as  the  term  is 

here  understood,  but  they  are  hard  to  distinguish  from 
profits  in  practical  life.  One  man  gains  a  temporary  success 
by  acts  that  are  later  punished  as  crimes ;  another,  guilty  of 
like  deeds,  escapes  conviction  for  lack  of  evidence  or  on 
technicalities,  and  enjoys  ill-gotten  wealth.  More  fortunes, 
however,  are  due  to  actions  on  the  border-line  of  ethics, 
which  society  is  not  yet  honest  enough  to  condemn  or  wise 
enough  to  prevent.  No  code  of  laws  can  be  framed  that  will 
make  possible  the  punishment  of  all  antisocial  acts.  Any  law 
that  would  catch  all  the  guilty  would  injure  many  of  the 
innocent.  Economic  analysis  may  exclude  from  the  concept 
of  profits  the  gains  made  by  such  means,  but  only  om- 
niscience could  distinguish  them  in  every  actual  case  from 
"  swag  and  boodle." 

2.  Some  profits  are  the  result  of  pure  chance  or  luck,  chance  prof- 
What  is  luck?     A  result  that  is  not  calculable,  coming  to  lts 

pass  in  conditions  where  a  rational  choice  is  not  possible,  is 
called  luck,  for  lack  of  another  name.  Now  pure  luck  often 
brings  temporary  profit  to  the  individual,  but  chance  does 
not  in  the  least  account  for  the  average  and  abiding  profits. 
There  is  bad  luck  as  well  as  good  luck.  According  to  the 
law  of  chance,  in  the  tossing  of  a  coin  for  ' '  heads  and  tails, ' ' 
one  side  is  as  likely  to  come  up  as  the  other,  and  in  the  long 
run  the  number  of  heads  and  tails  will  be  equal.  Where 
cases  are  numerous,  losses  and  gains  distribute  themselves 
about  a  general  average,  and  may  be  eliminated  by  insurance, 
as  that  against  fire,  flood,  lightning,  against  sickness  of  the 
employer,  which  would  cripple  the  business,  or  against  his 
death,  which  would  check  it.  But  many  factors  evade  all 

19 


290 


THE  LAW  OF  PROFITS 


[CH.  31 


Profits  due 
to  a  union 
of  chance 
and  choice 


Skill  the* 
essential 
condition  of 
continuing 
profits 


attempts  to  reduce  them  to  rule,  and  chance  remains  a 
considerable  factor  in  the  success  of  many  individuals.  It 
still  sometimes  appears  better  to  be  born  lucky  than  rich. 

3.  Some  profits  are   temporary  gains  from   happy   but 
not  entirely  accidental  choice  of  the   best  course.     Many 
cases  of  profit  said  to  be  due  to  chance  are  found  on  closer 
knowledge  to  be  due  to  superior  judgment.     A  slight  ad- 
vantage in  choice  will  give  now  and  then  apparently  chance 
gains.    The  adventurer  who,  on  the  discovery  of  gold,  goes 
at  once  to   California  or  to  Alaska,  may  stumble  upon  a 
gold-mine.     It  is  luck;  but  if  he  stays  at  home  it  is  more 
likely,  according  to  the  theory  of  chances,  that  he  will  stum- 
ble over  an  ash-heap.    In  places  where  gold-mines  are  compa- 
ratively plentiful,  one  takes  chances  between  a  load  of  lead 
and  a  bag  of  money.     Throughout  life  there  is  constant 
opportunity,  but  it  must  be  sought.     One  who  has  the  good 
judgment  to  be  ever  at  the  right  time  at  the  place  where 
he  has  the  best  chance  of  stumbling  upon  a  good  thing,  usu- 
ally gets  the  advantage,  and  men  call  it  luck.    The  more  the 
causes  of  success  in  general  are  studied,  the  larger  is  found 
the  element  of  choice,  the  smaller  that  of  luck.    Some  writers 
make  these  temporary  gains  the  essence  of  profits.     Con- 
sidering that  profits  are  always  due  to  the  introduction  of 
new  and  better  methods,  and  not  to  the  continued  use  of 
better  ones,  they  argue  that  as  the  knowledge  of  these  be- 
comes common  property  profits  will  disappear.     But  this  in 
our  view  is  a  partial  truth. 

4.  Continuing  profits  arise  from,  the  continued  exercise 
of  superior  judgment.     After  all  the  chance  elements  are 
taken  into  account,  there  remain  differences  in  the  abilities 
of  men,  and  a  continued  and  ever-renewed  need  of  organiz- 
ing power.    Profits,  being  recognized  as  due  to  these  differ- 
ences in  the  abilities  just  as  rent  is  due  to  differences  in  the 
fertility  and  efficiency  of  goods,  have  therefore  been  called 
differential  gains.     There  would  be  no  objection  to  the  term 
were  it  not  intended  to  emphasize  a  supposed  difference  be- 


§111]  STATEMENT   OF   THE   LAW   OF   PROFITS  291 


tween  profits  and  rents  on  the  one  hand  and  interest 
wages  on  the  other. 

Some  writers  have  so  magnified  the  thought  that  the  en-  Risk  of  loss 
terpriser's  function  is  to  assume  risk,  as  to  make  it  a  denial 
of  the  view  that  profits  are  the  earnings  of  ability.  The 
risks  of  business  are  not  those  of  the  throwing  of  dice  in 
which  (if  it  is  fair)  skill  plays  no  part,  and  gains  in  the 
long  run  offset  losses.  Business  risks  are  rather  those  of 
the  rope-walker  in  crossing  Niagara  ;  the  task  is  easily  under- 
taken by  the  skilful  Blondin,  it  is  fatally  dangerous  to  the 
man  of  unsteady  nerve  and  limb.  Profits  are  due  not  to 
risks,  but  to  superior  skill  in  taking  risks.  They  are  not 
subtracted  from  the  gains  of  labor  but  are  earned,  in  the 
same  sense  in  which  the  wages  of  skilled  labor  are  earned. 
So  long  as  some  men  have  better  organizing  ability  than 
others,  have  better  judgment,  are  better  able  to  take  the 
risks,  there  is  reason  to  believe  that  profits  will  continue. 

Profits  are  the  share,  or  income,  of  the  enterpriser  for  his 
skill  in  directing  industry  and_in  assuming  the  risks.  De- 
spite the  complex  influences,  Vthey  are  determined  by  his 
contribution  to  industry  essentially  as  is  the  value  of  any 
skilled  service. 


CHAPTER  32 

PROFIT-SHARING,  PRODUCERS'  AND  CONSUMERS' 
COOPERATION 


Nature  and 


sharing 


The  pos- 
sibilities of 
profit- 
sharing 


§  I.       PROFIT-SHARING 

1.  Profit-sharing  is  rewarding  labor  with  a  share  of  the 
profits  in  addition  to  contract  wages.    The  essential  mark  of 
profit-sharing  is  that  the  additional  payment  depends  on  the 
net  profits  of  the  whole  business  at  the  end  of  the  year.    It 
is  not  to  be  confused  with  a  free  gift,  or  with  special  privi- 
leges granted  by  the  employer,  such  as  lunch-rooms,  bath- 
rooms or  houses  at  a  low  rent.     Profit-sharing  is  a  contract 
made  in  advance,  not  a  free  gift.     Nor  is  it  the  same  as  a 
bonus  or  premium  for  a  larger  output,   made  contingent 
on  the  physical  product,  on  the  increased  number  of  pieces 
turned   out   by    the   workmen,    individually   or   in    groups. 
Premium  for  output  is  given  for  something  directly  under 
the  influence  of  the  worker.     The  amount  of  profits  is  af- 
fected by  the  amount  of  output,  but  also  by  a  number  of 
other  things  that  are  quite  outside  the  control  of  the  work- 
men. 

2.  The  purpose  of  the  employer  in  adopting  profit-shar- 
ing is  to  stimulate  the  industry  of  the  workers,  thus  reducing 
waste  and  cost  of  labor  and  supervision.     The   employer 
adopting  the  plan  does  not  intend  to  lose  by  it;  he  believes 
that  if  he  can  get  his  workmen  to  take  an  interest  in  the 
business  his  costs  will  be  reduced.    He  offers  to  divide  with 
them  the  resulting   savings.     There  is,   in   every   factory, 
greater  or  less  waste  of  materials,  destruction  of  tools,  and 

292 


§  I]  PROFIT-SHARING  293 

loss  of  time,  that  no  rules  or  penalties  can  prevent.  If  the 
worker  can  be  made  to  take  a  strong  enough  personal  inter- 
est he  will  use  care  when  the  eye  of  the  foreman  is  not 
upon  him.  The  product  also  can  be  slightly  increased  in 
many  ways  by  the  workmen's  exertions  or  suggestions.  In 
some  cases  the  quality  of  the  work  cannot  be  insured  by  the 
closest  inspection  as  well  as  it  can  be  by  a  small  degree  of 
personal  interest.  Either  responsibility  for  the  fault  cannot 
be  fixed,  or  the  defect  is  one  not  measurable  by  any  easily 
applied  standard.  Strikes  are  averted,  good  feeling  is  pro- 
moted, and  contentment  is  furthered  if  the  interest  of  the 
worker  can  be  made  to  approach,  and  actually  to  be  in 
harmony  with,  that  of  the  employer.  The  economic  result 
of  the  plan,  if  it  can  be  made  to  work,  must  be  to  reduce 
the  costs  of  these  establishments  below  what  they  are.  The 
crucial  question  is  whether  this  alone  insures  that  the  costs 
will  be  less  than  those  of  competitors,  thus  giving  a  source 
out  of  which  an  increased  amount,  really  a  wage,  can  be  paid 
to  the  laborer.  This  additional  wage  is  made  conditional 
on  the  employer's  success  in  gaining  a  net  profit  on  the 
year's  business. 

3.     The  profit-sharing  plan  is  now  successfully  working  its  suc- 
in  over  one  hundred  firms  in  America  and  Europe.     The   cessesand 

failures 

plan  was  first  tried  in  Paris  by  Leclaire,  a  house-painter. 
In  house-painting  there  is  often  a  great  waste  of  materials 
and  time  by  men  working  singly  or  in  small  groups  in  differ- 
ent parts  of  the  city.  By  this  new  method  Leclaire  enlisted 
the  aid  of  the  workmen,  reduced  the  costs,  and  increased  the 
profits.  It  is  a  remarkable  fact  that  the  plan  has  been  con- 
tinued successfully  by  the  same  firm  to  the  present  time. 
The  most  important  examples  of  profit-sharing  in  the  United 
States  are  the  Pillsbury  Mills  in  Minneapolis,  Procter 
and  Gamble's  soap -factories  at  Ivorydale,  0.,  and  the  Nel- 
son Mfg.  Co.  at  Leclaire,  111.  In  some  cases  both  man- 
ufacturer and  workman  value  the  system  highly.  N.  P. 
Oilman,  the  author  of  "Profit  Sharing,"  puts  the  ratio  of 


294 


PROFIT-SHARING  AND  COOPERATION 


[CH.  32 


Objections 
to  and  diffi- 
culties in 
profit- 
sharing  in 
practice 


successes  very  high.  Others  declare  that  the  failures  are 
mostly  lost  sight  of  and  are  very  many.  The  proportion  of 
business  done  in  this  way  is  not  large.  One  hundred  firms 
is  a  very  small  fraction  of  one  per  cent,  of  the  total  number 
of  firms  in  Germany,  France,  England,  and  America.  A 
still  more  important  fact  is  that  this  method  of  remuneration 
did  not  spread  in  the  ten  years  preceding  1900. 

4.  The  failure  of  profit-sharing  to  grow  is  due  to  objec- 
tions on  the  side  both  of  the  employer  and  of  the  workman. 
On  the  side  of  the  workman  there  is  the  bookkeeping  diffi- 
culty. He  is  suspicious,  and  he  lacks  knowledge  of  the 
business.  If  at  the  end  of  the  year  the  books  show  no 
profits,  the  workman  loses  confidence,  considers  the  plan  to 
be  mere  deception,  and  rejects  it.  Moreover,  the  plan  puts 
a  limitation  upon  the  workman's  freedom  to  compete  for 
better  wages  by  changing  his  place  of  work.  It  is  almost 
indispensable  to  make  length  of  service  a  condition  to  the 
sharing  of  profits.  Workmen  coming  and  going,  working 
only  a  few  months,  cannot  be  allowed  to  share;  the  per- 
centage given  to  the  others  increases  with  length  of  employ- 
ment. Whenever  men  are  thus  practically  subject  to  a  fine 
(equal  to  the  amount  of  shared  profits)  if  they  accept  a 
better  position,  there  is  danger  of  a  covert  lowering  of 
wages.  The  plan  tends  to  break  up  the  trade-unions,  which 
is  one  of  the  reasons  that  the  employers  like  it,  and  is  the 
reason  that  organized  labor  opposes  it.  The  employer  on  his 
part  objects  to  the  interference  with  his  management,  the 
troublesome  inspection  of  the  books,  and  the  constant  grum- 
bling and  complaint  of  the  workmen.  It  makes  known  the 
amount  of  his  profits;  if  they  are  large,  the  advertising  of 
his  success  invites  competition ;  if  they  are  small,  publicity 
injures  his  credit  and  depresses  the  value  of  his  property. 
In  view  of  all  these  difficulties  it  is  not  surprising  that  while 
the  plan  often  starts  promisingly,  it  usually  loses  its  effici- 
ency after  a  short  trial.  Business  methods  are  severely 
subject  to  the  principle  of  the  survival  of  the  fittest. 


§HJ  PRODUCERS'  COOPERATION  295 

Through  competition  and  the  survival  of  the  firms  that 
adopt  improvements,  better  methods  must  eventually  sup- 
plant poorer  ones.  If  a  method  fails  to  spread  when  it  has 
been  tried  for  fifty  years  and  all  are  free  to  adopt  it,  there 
must  be  some  defects  inherent  in  it.  That  must  be  our 
conclusion  as  to  profit-sharing. 

5.  It  is  usually  better  to  make  wages  depend  on  the  Defective 
worker's  efficiency  rather  than  on  the  profits  of  the  whole  profit. 
business.  The  strongest  motive  to  efficiency  is  present  when  sharing 
reward  is  connected  immediately  and  directly  with  effort, 
not  with  some  result  only  slightly  under  the  worker's  con- 
trol. In  profit-sharing  the  added  share  is  only  partially  due 
to  increased  effort  of  the  worker.  Labor  is  but  one  of  the 
groups  of  costs.  Profits  are  the  net  result  of  many  influ- 
ences. Chief  among  these  is  the  wisdom  of  the  enterpriser 
in  planning  and  conducting  the  business.  The  "profits" 
may  be  nothing,  though  the  worker  may  be  exerting  himself 
to  the  utmost.  The  plan  is,  therefore,  reactionary,  not  in 
accord  with  the  general  progress  of  the  wage  system,  which 
is  tending  constantly  to  centralize  responsibility,  to  put  the 
risk  into  the  hands  of  competent  managers,  and  to  secure 
to  the  worker  a  definite  amount  in  advance,  as  high  as 
conditions  make  possible.  The  system  of  premiums,  or  bonus 
payments,  for  output,  gives  in  most  cases  better  results  and 
is  rapidly  spreading.  It  is  sounder  in  conception  and  works 
better  in  practice.  This  premium  depends  on  the  increase 
by  the  laborer  of  the  output  of  his  particular  machine  or  pro- 
cess as  compared  with  a  standard  based  on  the  experience  of 
some  definite  period. 

§  n.    PRODUCERS'  COOPERATION 

1.     Producers'  cooperation  is  the  union  of  workers  in  a  Purpose  of 
self -employing  group  to  do  away  with  any  other  enterpriser  gyration 
than  themselves,  and  to  secure  for  themselves  the  profits. 
Its  object  is  not  to  do  away  with  any  return  on  the  capital 


296 


PROFIT-SHARING  AND  COOPERATION 


[CH.  32 


investment.  Capital  may  be  borrowed  either  from  outsiders 
or  from  the  individual  cooperators,  and  is  paid  a  stipulated 
interest  apart  from  the  profits.  The  source  of  the  gain  is  to 
be  found  in  the  saving  of  what  the  worker  looks  upon  as  the 
needless  drain  of  profits  into  the  pockets  of  the  employer. 
The  hope  is  that  the  enterpriser's  function  (if  it  is  admitted 
that  he  has  any  useful  function)  will  be  performed  by  the 
workers  collectively  or  through  their  representatives.  They 
undertake  to  furnish  brain  as  well  as  muscle,  management 
as  well  as  hand-work.  The  hope  is  even  to  increase  the 
profits  through  increasing  the  stimulus  to  the  workers  and 
by  saving  in  friction,  disputes,  and  strikes. 

2.  Practically  the  plan  has  been  made  to  work  in  a  com- 
paratively few  simple  industries.    The  most  notable  examples 
of  successful  cooperation  in  America  have  been  the  cooper- 
shops  in  Minneapolis.    There  were  a  simple  problem  of  costs, 
few  and  uniform  materials,  patterns,  and  qualities  of  prod- 
uct, few  machines  and  much  hand-labor,  simple  well-known 
processes,  a  sure  local  market.    Mr.  Lloyd,  in  a  recent  book, 
describes  many  successful  societies  in  England,  but  they 
are  all  of  a  simple  sort  of  industry,  as  agriculture  and  dairy- 
farming.     Within  the  whole  field  of  industry,  this  method 
of  organization  makes  little  if  any  progress.     Most  experi- 
ments have  failed   and  the  successful  ones  often   become 
ordinary  stock  companies  with  the  most  able  men  in  control. 
Therefore,  whether  losing  or  making  money,  they  nearly  all 
cease  to  exist  as  cooperative  enterprises.    This  result  has  dis- 
appointed the  prophecies  of  many  wise  men  of  seventy-five 
years  ago.     In  the  time  of  John  Stuart  Mill,  great  expecta- 
tions were  entertained  of  the  future  of  productive  coopera- 
tion, which  was  thought  to  be  a  solution  of  the  whole  social 
problem. 

3.  The  main  difficulty  in  productive  cooperation  is  to 
secure  managing  ability  of  a  high  order.    There  is  no  touch- 
stone for  business  talent,  no  way  of  selecting  it  with  any 
certainty  in  advance  of  trial.     This  selection  is  made  hard 


§11]  PRODUCERS7  COOPERATION  297 

in  cooperative  shops  by  the  jealousies  and  rivalries,  and 
by  the  politics  among  the  workmen.  A  man  thus  selected 
by  his  fellows  finds  it  almost  impossible  to  enforce  discipline. 
In  cooperation  there  is  occasionally  developed  good  business 
ability  that  might  have  remained  dormant  under  the  wage 
system ;  some  workmen  showing  unusual  capacity  cease  to  be 
handicraftsmen.  But  the  unwillingness  on  the  part  of  the 
workers  to  pay  high  salaries  results  in  the  loss  of  able  man- 
agers. Having  demonstrated  their  ability,  the  leaders  go 
to  competing  industries  where  their  function  is  not  in  such 
bad  repute,  and  where  higher  salaries  can  be  earned;  or 
they  go  into  business  independently,  being  able  easily  to  get 
control  of  the  necessary  capital. 

4.  Most  cooperative  schemes  have  suffered  from  a  lack  cooperators 
of  good  theory,  an  inability  of  the  workers  to  see  the  im-  ™een~ter-Ue 
portance  of  the  enterpriser's  service.  Most  men  make  a  pnser's 
very  imperfect  analysis  of  the  productive  process.  They  see 
that  a  large  part  of  the  product  does  not  go  to  the  workmen ; 
they  see  the  gross  amount  going  to  the  enterpriser,  and  they 
ignore  the  fact  that  this  contains  the  cost  of  materials,  interest 
on  capital,  and  incidental  expenses.  They  ignore  further 
that  the  enterpriser's  function  is  a  productive  and  essential 
one.  The  theory  of  exploitation,  or  robbery,  as  explaining 
the  employer's  profits,  is  very  commonly  held  in  a  more  or 
less  vague  way  by  workmen.  With  a  body  of  intelligent 
and  thoroughly  honest  workmen,  keenly  alive  to  the  truth, 
the  dangers,  and  the  risks  of  the  enterprise,  cooperation 
would  be  possible  in  many  industries  where  now  it  is  not. 
The  producers'  cooperative  schemes  usually  stumble  into  an 
unsuspected  pitfall.  When  a  heedless  and  over-confident 
army  ventures  into  an  enemy's  country  without  a  knowledge 
of  its  geography,  without  a  map,  and  without  leaders  that 
have  been  tested  on  the  field  of  battle,  the  result  can  easily 
be  foreseen. 


298 


PROFIT-SHARING   AND  COOPERATION 


[OH.  32 


Nature  and 
kinds  of 
consumers' 
cooperation 


Costliness 
of  com- 
petitive 
mercantile 
business 


§  III.      CONSUMERS '    COOPERATION 

1.  Consumers'  cooperation  is  the  union  of  a  number  of 
buyers  to  save  for  themselves  the  profits  of  the  merchants 
or  agents.    There  are  many  classes  of  consumers'  cooperation, 
but  the  chief  ones  are:    (1)   to  sell  goods   (retail  stores); 

(2)  to  provide  insurance  (cooperative  insurance  companies)  ; 

(3)  to  provide  credit  or  capital  (cooperative  banks).    These 
are  also  productive  enterprises,  for  the  merchant 's  work  adds 
value  to  the  goods,  the  insurance  company  and  its  agent 
do  a  real  service,  the  profits  of  the  small  bank  are-,  ordinar- 
ily, earned  fairly  under  existing  conditions.    The  terms  pro- 
ducers' and  consumers'  cooperation  merely  set  in  contrast 
the  part  of  the  productive  process  that  is  undertaken.    Pro- 
ducers' cooperation  is  concerned  with  the  earlier  steps,  usu- 
ally stopping  when  the  product  is  disposed  of  to  wholesale 
or  retail  merchants.     Consumers'  cooperation   (often  called 
distributive  cooperation)  is  concerned  with  the  later  steps, 
the  placing  of  a  consumption  good  (rarely  also  productive 
agents)   into  the  hands  of  the  final  user.     It  imparts  the 
same  value  to  goods  that  the  retail  merchant  does.    The  one 
thing  this  class  of  cooperators  is  sure  of  when  they  begin 
is  a  number  of  consumers  to  make  use  of  the  service  or  prod- 
ucts they  purpose  to  supply ;  hence  the  name. 

2.  The  waste  of  competitive  mercantile  business  is  the 
source  from  which  it  is  expected  that  the  savings  of  the 
cooperative  enterprise  will  come.     It  is  a  great  expense  to 
the  retail  dealer  to  secure  a  body  of  customers.     Rent  of 
store-room,  clerk  hire,  interest  on  invested  capital  are  fixed 
charges,  which  can  be  met  only  on  condition  of  a  regular 
and  frequent  turnover  of  the  stock.     To  attract  customers 
the  dealer  must  have  a  well-located  store,  must  advertise, 
keep   open  long  hours,   and  pay  idle   clerks.     Frequently 
he   must   give   credit,    raising   the   price   enough   to   cover 


§111]  CONSUMERS'  COOPERATION  299 

the  expense  of  bookkeeping,  collection,  bad  accounts, 
and  loss  of  interest.  The  public's  likings,  whims,  lack 
of  judgment,  and  lack  of  business  analysis  make  these 
charges  necessary.  There  are  many  communities  where  it 
would  be  impossible  to  carry  on  a  cash  business  even  at 
considerably  lower  prices.  Customers  are  exacting  and  re- 
quire the  costly  delivery  of  small  packages;  two  horses  and 
a  driver  must  travel  two  miles  to  deliver  a  spool  of  thread 
or  a  half-dozen  oranges.  Frequent  changes  of  fashion  and 
the  shifting  of  customers  from  one  store  to  another  keep  the 
merchant  always  insecure  in  his  trade.  A  number  of  buyers 
mutually  agreeing  to  pay  cash,  to  buy  at  certain  times,  to 
place  all  their  orders  with  one  store,  to  go  to  a  cheaper 
location,  down  an  alley  or  into  a  basement,  can  save  much 
of  this  cost  on  one  condition :  that  the  management  ap- 
proaches in  its  efficiency  that  of  ordinary  competitive  busi- 
ness. In  spite  of  all  these  advantages,  if  there  is  inefficient 
management  the  final  cost  will  be  no  less  than  that  of  ordi- 
nary business. 

3.  Despite  the  possibilities  of  saving,  most  cooperative  The  more 
stores  fail  through  a  lack  of  good  management,  Note  first  the 
greater  successes.  Since  1842,  from  which  time  it  dates,  the  stores 
cooperative-store  movement  has  progressed  steadily  in  Eng- 
land, where  the  scores  of  retail  societies  are  federated  and 
own  large  wholesale  stores.  The  long  experience  has  devel- 
oped good  methods  and  a  conservatism  almost  inconceivable 
to  an  American  mind.  They  are  practically  great  stock  com- 
panies in  which  one  can  buy  a  share  at  a  small  cost  and  be- 
come a  purchaser  at  usual  prices,  receiving  a  dividend  later 
according  to  the  amount  of  his  purchases.  Cooperative  stores 
in  American  universities  are  generally  successful,  apparently 
because  they  don't  cooperate.  Some  get  into  politics  and  go 
the  way  of  the  wicked.  The  survivors  gravitate  into  the 
hands  of  a  committee  of  the  faculty,  which  tries  to  employ  an 
efficient  manager,  and  administers  the  business  as  a  public 


300 


PROFIT-SHARING  AND  COOPERATION 


[CH.  32 


The  failures 
and  their 
causes 


Profit- 
sharing  and 
cooperation 
in  relation 
to  the 
enterpriser 


trust  without  private  profit.  The  wastefulness  of  multiply- 
ing orders  for  text-books  to  be  used  by  a  class  whose  number 
is  definitely  known  in  advance,  and  the  comparatively  uni- 
form character  of  the  supplies,  make  economy  peculiarly  easy 
in  this  case.  A  large  part  of  the  services  of  the  cooperative 
store,  however,  are  indirect;  it  reduces  and  regulates  the 
charges  in  the  stores  near  by. 

Nearly  all  the  Granger  stores,  started  thirty  years  ago  in 
great  numbers,  and  most  of  the  cooperative  stores  among 
American  workmen,  have  failed.  The  failure  is  easily  ex- 
plained by  the  ignorance  of  danger,  by  lack  of  harmony,  by 
credit  sales,  and  by  inefficient  management.  The  wastes  of 
competitive  business  are  partly  a  tax  imposed  upon  men 
(taken  collectively)  by  their  lack  of  business  method;  the 
community  is  not  intelligent  enough,  honest  enough,  or 
self-sacrificing  enough  to  do  business  in  the  most  economical 
way.  Partly  they  are  the  price  paid  for  variety  and  change, 
and  for  the  cherished  American  right  "to  kick"— some- 
thing difficult  for  the  members  of  a  cooperative  store  to  do 
without  hurting  themselves. 

4.  The  experience  with  these  plans  verifies  the  analysis 
of  the  enterpriser's  function:  pure  profits  are  the  earnings 
of  a  productive  service.  Comparing  these  three  plans,  they 
are  seen  to  be  alike  in  seeking  to  make  workers  share  some  of 
the  profits,  to  change  the  destination  to  which  profits  would 
go.  The  first  would  create  profits  by  the  effort  of  the  workers, 
and'  give  them  a  part  of  the  saving.  The  second  would  have 
collective  workers  perform  the  enterpriser's  work  in  the 
factory  and  get  his  reward.  The  third  would  have  collective 
buyers  do  the  work  of  the  merchant  and  save  his  profits  and 
other  costs.  The  last  is  the  easiest  to  do.  Profit-sharing  is 
next  in  difficulty,  and  producers'  cooperation  is  the  hardest 
of  all  to  put  into  practice.  In  some  cases,  under  some  con- 
ditions, the  enterpriser's  services  may  be  more  economically 
performed  than  at  present,  for  the  waste  is  great.  But 
taking  men  as  they  are  and  things  as  they  are,  in  most 


4  HI]  CONSUMERS'   COOPERATION  301 

places  the   enterpriser's  service  is  necessary  and  must  be   continued 
paid  for.     His  contribution  to  the  success  of  the  industry   enterpriser 
depends  on  his  nature  and  ability,  and  it  can  be  distinguished 
theoretically  and  practically  from  the  contribution  made  by 
the  workmen.    Nothing  but  changes  in  human  nature,  in  ed- 
ucation, and  in  morality  can  diminish  the  necessity  for  his 
service. 


CHAPTER  33 
MONOPOLY    PROFITS 


Difficulty  of 
fixing  the 
meaning  of 
monopoly 


Monopoly  is 
not  merely 
scarcity 


§  I.      NATURE   OF   MONOPOLY 

1.  The  term  monopoly  is  used  loosely  and  in  many  senses. 
In  popular  discussion  monopoly  means  almost  any  wealthy 
corporation  or  the  power  the  corporation  possesses,  a  power 
which  is  usually  thought  of  as  oppressive.    Even  economists 
have  held  the  vaguest  ideas  regarding  monopoly.    The  recent 
rise  of  trusts  and  monopolies  has  given  a  large  new  body 
of  facts  bearing  upon  the  subject,  but  all  the  resulting  dis- 
cussion by  the  public  and  by  economists  has  not  brought 
agreement  upon  a  definition  entirely  satisfactory.     When 
usage  has  not  settled  upon  any  one  meaning,  the  selection  of 
a  definition  is  in  a  measure  arbitrary,  though  it  may  be 
guided  by  logic  and  considerations  of  expediency.     Let  us 
state  the  various  meanings  and  indicate  the  one  adopted  in 
this  discussion. 

2.  Monopoly   should  not  ~be  used  as  synonymous  with 
scarcity.     Scarcity  is  the   essential   condition  of  all  value. 
The  simplest  things— bricks,  sand,  the  commonest  unskilled 
labor— would   have  no   value   were   there   not   a   degree   of 
scarcity  relative  to  the  wants  that  may  be  gratified.     "Mo- 
nopoly," whatever  else  it  means,  always  conveys  the  idea  of 
some  exceptional  kind  of  scarcity,  scarcity  due  in  part  to 
some  source  or  cause  not  ordinarily  present.     It  is  a  bad 
practice  in  definition  to  apply  two  words  to  one  idea,  leaving 
the  other  idea  unnamed,  as  is  done  when  monopoly  is  made 
synonymous  with  scarcity.    Both  words  are  needed.    Such  a 

302 


§1]  NATURE  OF  MONOPOLY  303 

usage  unfortunately  is  common  in  economic  literature. 
Many  economic  writers,  for  example,  have  called  land- 
ownership  monopoly,  saying  that  land  being  the  work  of 
nature  cannot  be  increased  by  men,  and  therefore  must 
always  be  scarce.  Even  if  it  were  true  that  in  the  economic 
sense  land  could  be  produced  by  man,  there  still  would  be 
confusion  here  between  a  general  class  of  goods  and  a 
special  thing.  The  fact  that  a  particular  field  cannot  be 
duplicated  does  not  make  a  monopoly  of  land  as  a  whole, 
any  more  than  the  existence  of  desert  land  in  Arizona  makes 
land  valueless  or  a  free  good.  Nor  is  a  land-owner  a  monopo- 
list any  more  than  is  the  owner  of  a  valuable  machine.  The 
owner  of  forty  acres  of  land  worth  four  hundred  dollars,  or 
the  owner  of  a  village  lot  worth  a  hundred  dollars,  can 
hardly  be  called  a  monopolist.  It  leads  to  absurdity  to  use 
the  word  monopoly  with  reference  to  landownership  indis- 
criminately. Neither  mere  scarcity  nor  the  limitation  of 
natural  stores  should  be  called  monopoly  when  ownership 
is  scattered  and  combination  between  owners  does  not  exist. 

3.     The  ability  of  superior  material  agents  and  of  skilled  Monopoly  is 
workers  to  secure  higher  returns  than  do  poor  ones  does  superior617 
not  constitute  monopoly.     The  free  competition  assumed  in  economic 


abstract  discussions  of  value,  does  not  mean  equal  capacity 
or  efficiency,  but  the  legal  freedom  and  personal  willing.- 
ness  to  move  a  productive  agent  into  the  highest  industrial 
place  it  is  capable  of  holding.  The  rocky  field  does  not 
compete  with  the  fertile  one  in  the  sense  that  it  can  yield 
the  same  uses.  The  field  fit  only  for  potatoes  does  not 
compete  with  those  rare  and  favored  localities  that  can 
raise  the  best  wines.  The  gardener  earning  two  dollars  a  day 
does  not  compete  with  the  skilled  physician  with,  an  income 
of  twenty  thousand  dollars  a  year,  for  he  has  not  the  eco- 
nomic capacity  to  do  so;  bat  he  is  free  to  compete  (as  is  the 
owner  of  the  rocky  field)  unless  law,  caste,  class  legislation, 
social  prejudice,  or  some  other  objective  factor  forbids. 
Anything,  however,  that  prevents  the  labor  or  capital  of 


304 


MONOPOLY  PROFITS 


[CH.  33 


Monopoly 
consists  in 
unified 
control 


Definition  of 
monopoly 


buyers  or  sellers  from  application  for  which  they  are  fitted, 
defeats  free  competition.  To  use  the  term  monopoly  of  any 
and  every  limitation  of  economic  ability  is  to  extend  it  to 
every  case  of  value.  To  use  it  of  the  high  wages  of  skilled 
workmen,  where  no  union  to  suppress  competition  exists 
among  them,  is  to  make  it  a  colorless  synonym  of  scarcity. 
It  should  be  confined  to  a  narrower  and  more  exclusive  use. 
Some  special  kinds  of  limitation  should  be  connected  with 
the  idea  of  monopoly. 

4.  The  limitation  connected  with  monopoly  is  not  that  of 
economic  capacity  but  that  of  ownership  and  control.     The 
derivation  of  the  word  from  the  Greek  points  to  the  general 
thought :  monos,  alone,  andj^e&Jfl-Sfill,  a  single  seller,  the 
sole  source  of  supply  in  a  given  market.    The  term  was  first 
used  in  England  of  special  grants  or  patents  of  monopoly 
from  the  crown  to  make  or  deal  in  specified  articles,  such  as 
soap,  candles,  etc.     The  political  power  of  the  state  created 
and  defended  the  monopoty.     This  policy  is  pursued  in  a 
limited  degree  to-day  for  the  encouragement  of  invention, 
in  the  granting  of  patents  and  copyrights.     In  the  current 
definition,    "  The   exclusive   right,   power,    or   privilege   of 
dealing  in  some  article  or  trading  in   some  market,"  the 
term  "  dealing  in  "  is  well  chosen,  for  it  is  broad  enough  to 
cover  cases  of  buying  as  well  as  selling,  and  includes  power 
derived  from  political  as  well  as  from  other  sources.    But  the 
term  "exclusive"  is  too  absolute,  allows  of  no  gradations, 
and  makes  the  definition  applicable  only  in  the  rarest  cases. 

5.  Monopoly  is  such  a  degree  of  control  over  the  supply 
of  goods  in  a  given  market  that  a  net  gain  will  result  to  the 
seller  if  a  portion  is  withheld.    Every  producer  has  control 
over  some  agents  and  some  portion  of  the  supply  of  prod- 
ucts; but  ordinarily  the  portion  controlled  by  any  one  is 
so  small  that  withholding  it  entirely  from  sale  would  not 
cause  the  market  price  to  rise  in  any  appreciable  degree.  The 
producer  in  such  a  case  regulates  his  action  as  if ^the  market 
price  were  fixed  beyond  his  control,  and  he  uses  his  pro- 


§H]  KINDS  OF  MONOPOLY  305 

ductive  agents  fully  up  to  the  point  where  costs  equal  price 

on  the  marginal  unit  of  product.    A  skilled  worker  getting 

five  dollars  a  day  loses  that  sum  every  day  he  is  idle.     A 

landowner  whose  land  can  command  a  competitive  rent  of 

ten  dollars  an  acre  must  take  that  sum  or  less,  or  nothing; 

he  cannot  get  more.    How  can  a  net  gain  ever  result  from  a  Monopoly 

smaller  sale?    As  a  reduction  of  supply  results  in  a  higher 

price,  it  is  possible,  as  is  seen  in  tlje_ paradox  of  .value,  for 

a  situation  to  arise  in  the  case  of  some  goods,  where  a  smaller 

number  of  units  yield  a  larger  sum  in  the  market  than  a 

larger  number  of  units.    But  the  seller's  interest  lies  not  in 

the  increase  of  total  sales,  but  in  that  of  net  gains.     Net 

gains,  being  the  product  of  the  number  of  units  sold  mul-  / 

tiplied  by  the  gain  on  each  unit,  increase  at  a  much  faster      [^ 

rate  than  do  total  sales.  I  The  existence  of  monopoly  power  , 

in  any  degree  depends  therefore  on  several  factors :  the  effect 

of  contraction  of  supply  in  raising  prices,  the  effect  on  costs, 

the  number  of  units  remaining  in  the  ownership  of  the  one 

contracting  supply,  and  the  possibility  of  preventing  others 

from  increasing  supply  later  to  profit  by  the  higher  prices. 

§  II.      KINDS    OF   MONOPOLY 

1.     Monopoly  gets  its  power  from  political,  economic,  and  j^ne 
commercial  sources.    A  political  monopoly  derives  its  power 
of  control  from  a  special  grant  from  the  government,  forbid- 
ding others  to  engage  in  that  business.    The  typical  political 
monopoly  is  that  conferred  by  a  crown  patent  bestowing  the 
exclusive  right  to  carry  on  a  certain  business.     A  second  /\jjj  - 
kind  is  that  conferred  by  a  patent  for  invention,  or  the  copy- 
right on  books,  the  object  of  which  is  to  stimulate  invention,,, 
research,  and  writing  by  giving  the  full  control  and  protec- 
tion of  the  government  to  the  inventor  and  writer  or  their  Political 
assignees.  In  this  case  the  privilege  is  socially  earned  by  the   r 
monopolist ;   it   is   not   gotten   for  nothing.     Moreover,   the 
patent  is  limited  in  time,  expires  and  becomes  a  social  pos- 


306  MONOPOLY  PROFITS  [CH.  33 

^I  session.     A  third  kind  is  a  government  monopoly  for  pur- 
/  poses  of  revenue.     In  France,  the  government  controls  the 
L  tobacco  trade,  and  the  high  price  charged  for  tobacco  makes 
|  the  monopoly  yield  a   large  income.     A   fourth   kind  are 
public    franchises    for    public    service,    as    street-railways, 
lights,  gas,  waterworks,  etc.     These  are  granted  to  private 
capitalists  to  induce  them  to  invest  capital  in  something 
which  has  public  utility. 

Economic  V  Economic  monopoly  arises  when  the  ownership  of  scarce 
monopoly  I  natural  agents,  as  mines,  land,  water-power,  comes  under  the 
'  control  of  one  man  or  one  group  of  men  who  agree  on  a 
price.  Economic  monopoly  is  a  result  of  private  property 
that  is  undesigned  by  the  government  or  by  society.  It  is 
exceptional,  considering  the  whole  range  of  private  property, 
but  it  is  important.  The  oil-wells  embracing  the  main  sources 
of  the  world's  supply  have  come  under  one  control.  One 
corporation  may  control  so  many  of  the  richest  iron-mines 
of  the  country  as  to  be  able  to  fix  a  price  different  from  that 
which  would  result  under  competition.  Coal-mines,  espe- 
cially those  of  some  peculiar  and  limited  kind,  such  as 
anthracite,  appear  to  become  easily  an  object  of  monopoli- 
zation. Economic  monopoly  merges  into  political  monopolies, 
such  as  patents  and  franchises.  Private  property  is  a  polit- 
ical institution  designed  to  further  social  welfare,  and  only 
rarely  is  any  particular  property  a  monopoly.  Private  con- 
trol of  great  natural  resources  doubtless  would  have  been 
^prohibited  had  it  been  foreseen. 

Commercial  monopoly,  variously  called  contractual,  or- 
ganized, or  capitalistic  monopoly,  arises  where  men  unite 
their  wealth  to  control  a  market,  to  overpower  or  intimidate 
^position,  and  to  keep  out  or  limit  competition  by  the  mere 
Jnagnitude  of  their  wealth.  These  various  kinds  so  merge 
into  each  other  that  they  cannot  always  be  distinguished  in 
practice.  A  patent  may  help  a  capitalistic  monopoly  in 
getting  control  of  a  market;  great  wealth  may  enable  a 
company  to  get  control  of  rare  natural  resources. 


Commercial 
monopoly 


I    V- 

V  ^ 

KINDS   OF   MONOPOLY 


307 


2.  Monopolies  may,  for  special  purposes,  be  classified  also  special 
as  selling  and  buying,  producing  and  trading,  lasting  and  ^^0*1* 
temporary,  general  and  local.    The  terms  selling  and  buying 
monopoly    explain    themselves,    though    the    latter    conflicts 

with  the  etymology.  Under  conditions  of  barter  the  selling 
and  the  buying  monopoly  would  be  the  same  thing  in  two 
aspects.  A  selling  monopoly  is  by  far  the  more  common, 
but  a  buying  monopoly  may  be  connected  with  it.  A  large 
oil-refining  corporation  that  sells  most  of  the  product  may 
by  various  methods  succeed  in  driving  out  the  competitors 
who  would  buy  the  crude  oil.  It  thus  becomes  practically 
the  only  outlet  for  the  oil  product,  and  the  owners  of  the 
land  thus  must  share  their  ownership  with  the  buying 
monopoly  by  accepting,  within  certain  limits,  the  price  it 
fixes.  The  Hudson  Bay  Company,  dealing  in  furs,  had 
practically  this  sort  of  power  in  North  America.  Many  in- 
stances can  be  found,  yet,  relatively  to  the  selling  monopolies, 
those  of  the  buying  kind  are  rare.  A  producing  monopoly 
is  one  controlling  the  manufacture  or  the  source  of  supply 
of  an  article;  a  trading  monopoly  is  one  controlling  the 
avenues  of  commerce  between  the  source  and  the  consumers. 
Monopolies  are  lasting  or  temporary,  according  to  the  du- 
ration of  control.  By  far  the  larger  number  are  of  the 
temporary  sort,  because  high  prices  strongly  stimulate  ef- 
forts to  develop  other  sources  of  supply.  Yet  the  average 
profits  of  a  monopoly  may  be  large  throughout  a  succession 
of  periods  of  high  and  low  prices.  Monopolies  are  general 
or  local,  according  to  the  extent  of  territory  where  their  power 
is  felt.  At  its  maximum  where  transportation  and  other  costs 
most  effectually  shut  out  competition,  monopoly  power  shades 
off  to  zero  on  the  border-line  of  competitive  territory. 

3.  Degrees  of  power  to  affect  price  result  from  varying   Relativity 
extent  of  control;  monopoly  is  a  relative  term.     The  term  ofmon°P01y 
monopoly  by  its  derivation  has  reference  to  a  single  seller; 

but  there  are  other  thoughts  in  the  concept.  Monopoly  has 
reference  also  to  the  amount  of  the  supply  controlled.  The 


308 


MONOPOLY  PROFITS 


[CH.  33 


The  test  of 
monopoly 


frequent  use  of  the  adjectives  partial,  limited,  and  virtual 
are  implied  but  usually  superfluous  recognitions  of  the  rela- 
tive character  of  monopoly.  Ownership  of  a  particular 
knife,  pencil,  book,  makes  one  the  unique  seller  of  it,  but 
confers  no  monopoly  power,  as  the  power  of  substitution  is 
practically  absolute;  the  welfare  of  no  one  depends  in  any 
appreciable  measure  on  that,  particular  pencil.  Ownership 
of  an  important  fraction  of  an  entire  species  of  goods  gives 
more  power  to  affect  value.  One  owning  a  large  part  of 
the  desirable  building  sites  or  houses  in  town  may  gain  by 
occasionally  letting  one  stand  vacant  in  order  to  drive  better 
bargains  with  tenants.  A  trade-union  may  control  most  of 
the  labor-supply  of  one  kind  in  a  town.  But  the  test  of 
monopoly  is  that  a  gain  results  from  a  higher  price  and  fewer 
sales.  It  begins  at  the  point  where  there  is  a  motive  to  limit 
the  supply  in  accordance  with  the  paradox  of  value.  The 
control  of  an  entire  species  of  goods  gives  price-fixing  power, 
limited  only  by  substitution  of  goods.  Even  though  one 
person  controlled  all  the  coal  and  wood  in  any  market,  their 
prices  still  would  be  limited.  If  there  were  but  one  possible 
source  of  meat-supply,  most  people  could  live  without  meat. 
The  monopoly  of  great  species  of  goods  can  thus  be  seen 
gradually  to  merge  from  one  grade  into  another.  It  is  a 
matter  of  quality  as  well  as  quantity.  There  is  more  or  less 
of  it  in  the  different  industries,  and,  as  noted  in  the  pre- 
ceding paragraph,  it  varies  over  time  and  territory. 


Forces 
governing 
competitive 
prices 


§  III.      THE    FIXING    OF    A    MONOPOLY    PRICE 

1.  A  competitive  producer  gets  the  highest  price  that 
will  permit  him  to  dispose  of  his  product.  The  enterpriser 
seeks  to  get  the  highest  price  for  his  product  that  the  market 
will  afford.  His  ability  to  continue  making  a  profit  at  a 
lower  price  does  not  induce  him  to  reduce  the  price  unless 
the  reduction  is  to  his  interest.  The  ordinary  competing 
manufacturer  is  limited  in  his  price  by  two  things:  first, 


§111]  THE  FIXING  OF  A  MONOPOLY  PRICE  309 

his  customers  may  cease  to  buy  such  articles  entirely  and  / 
may  substitute  other  goods  if  the  price  is  too  high ;  secondly,  I 
they  may  buy  of  other  sellers.     Between  his  wish  to  keep 
the  price  up,  and  the  customer's  wish  to  buy  as  cheaply  as 
he  can,   the  price  is  fixed  at  a  point  where  there  is  no 
inducement  for  others  to  come  in  and  reduce  his  sales,  or 
for  him  to  seek  a  better  market.    There  may  be  under  these 
conditions  a  potential  but  very  limited  monopoly  power. 
The  sole  druggist  in  a  small  town  might  occasionally  get 
extortionate  prices  from  particular  customers  in  times  of 
dire  need,  but  he  would  thus  drive  away  much  of  his  custom, 
and  would  tempt  a  fairer  and  less  grasping  competitor  to 
come  in.    Thus,  when  men  and  capital  are  free  to  come  andl 
go,  there  results  an  average  or  normal  return  for  ability  and) 
agents  of  a  certain  grade.    Prices  come  to  equilibrium  where/ 
each  is  selling  his  total  product. 

2.  Where  a  monopoly  exists  to  a  greater  or  less  degree,  Monopoly' 
there  is  less  reason  to  fear  loss  of  custom  to  competitors.  {JJ^Jp 
The  degree  of  control  determines  the  fear  of  competitors. 
If  the  control  is  slight,  a  very  small  rise  of  price  will  bring 
in  competitors.  The  monopoly  profits  in  this  case  either 
must  be  very  small  or  they  will  be  very  brief.  Those  outside, 
controlling  a  large  supply,  will  be  tempted  by  large  profits 
to  market  it  at  once  and  to  increase  it  as  fast  as  possible. 
Even  where  a  large  part  of  the  supply  is  under  one  control,  9 
the  fear  of  substitution  puts  a  limit  on  the  price  demanded. 
If  the  control  were  extended  to  all  wealth,  the  monopolist 
would  be  the  absolute  despot  of  the  lives  of  his  fellows. 
But  as  things  are,  the  monopolist  aims,  just  as  the  competitor 
does,  to  get  the  price  that  gives  the  maximum  gain.  The 
monopolist,  however,  is  in  a  more  or  less  favored  position, 
as  he  can  raise  his  price  considerably  before  losing  the  most 
of  his  customers.  Much  depends  on  whether  the  costs  in- 
crease or  decrease  as  output  grows.  Where  a  large  increase 
in  output  greatly  decreases  the  cost,  lower  price  may  leave 
a  larger  margin  between  the  cost  and  the  selling  price.  A 


310  MONOPOLY  PROFITS  [CH.  33 

general  monopoly  price  is  therefore  not  an  unlimited  price. 
It  is  higher  than  the  competitive  price  if  the  same  cost  of 
production  is  maintained.  It  may  conceivably  be  lower  than 
the  former  competitive  price  if  the  economies  of  combination 
greatly  reduce  the  cost  and  justify  a  large  increase  of  the 
output. 

Discrimi-  3.  A  monopoly  often  seeks  to  avoid  a  general  market 
nopcJy  rates  Pr^ce)  and  ^  adjusts  its  charge  in  each  small  market  sepa- 
rately. This  is  a  most  important  aspect  of  the  monopoly 
problem  and  a  most  important  modification  of  the  principle 
just  stated.  A  market  price  is  the  expression  of  the  least 
urgent  demand  that  aids  in  carrying  off  a  given  supply. 
It  is  a  maxim  that  there  can  be  but  one  price  at  a  time  in 
a  given  market.  The  baker  ordinarily  sells  the  loaf  at  the 
same  price  to  every  one  buying  a  given  quantity.  If  he 
had  a  monopoly  of  the  bread-supply,  however,  he  might 
deal  with  each  customer  separately,  ascertain,  by  personal 
inquiry  into  the  lives  of  the  citizens  and  by  the  aid  of  a 
force  of  detectives,  just  how  much  each  could  or  would  pay 
rather  than  do  without  bread.  The  policy  of  varying  prices 
is  thus  followed  by  monopolies,  though  usually  in  a  less 
inquisitorial  way,  to  enable  them  to  get  the  highest  possible 
returns.  Under  the  name  of  "  charging  what  the  traffic  will 
bear,"  it  is  practiced  by  the  railroads  as  local  and  personal 
discrimination.  The  endurance  of  some  communities  and  of 
some  individuals  being  greater  than  that  of  others,  the 
burden  is  adjusted  to  the  back,  being  made  not  as  light  but 
as  heavy  as  each  can  be  forced  to  bear. 

LOW  rates  Large  monopolies  dealing  in  commodities  use  an  adapta- 
competitors  t*on  °^  ^s  method  to  kill  off  small  competitors  who,  within 
a  certain  district,  sell  at  less  than  the  monopoly  price.  Prices 
are  suddenly  reduced  in  that  community  below  cost  until, 
the  small  competitor  being  ruined,  the  monopoly  rate  is 
reestablished  perhaps  higher  than  before.  Fear  of  suffer- 
ing a  like  fate  prevents  others  from  attempting  competition 
even  when  prices  offer  a  great  attraction  and  give  a  high 
monopoly  profit. 


r 


VMIIJ  THE  FIXING  OF  A  MONOPOLY  PRICE  311 

The  profits  of  monopoly  can  be  explained  by  the  ordinary   The  source 
laws  of  value,  yet  evidently  they  form  a  peculiar  economic   i[s™°nop°~ 
and  social  problem.    They  appear  to  be  due  not  to  the  ser-   profits 
vices  of  the  enterpriser  in  increasing  production,  but  to  his 
success  in  limiting  it.     There  is,  therefore,  an  antisocial  ele- 
ment in  them  not  found  in  the  profits  of  ordinary  industry. 
This  deserves  further  and  closer  study. 


CHAPTER  34 

GROWTH    OF    TRUSTS    AND    COMBINATIONS    IN 
THE    UNITED    STATES 

§  I.       GROWTH  OP  LARGE  INDUSTRY  IN  THE  UNITED  STATES 

Distinction  1.  In  the  discussion  of  the  so-called  trust  problem  three 
^n9s  must  be  distinguished:  large  individual  capital,  large 
production,  and  monopoly  power.  Capital,  in  the  sense  of 
valuable  agents,  is  found  in  the  smallest  as  well  as  the  largest 
industry,  and  every  owner,  from  the  small  shop-keeper  to 
the  wealthiest  bondholder,  is  a  capitalist.  In  popular  dis- 
cussion, however,  the  word  frequently  implies  great  wealth 
in  a  single  hand,  though  this  wealth  may  be  invested  in  a 
Large  large  number  of  small  industries.  Large  production  is  the 

production  concentration  of  capital  into  large  units  of  industry.  The 
capital  may  be  the  same  as  before,  the  ownership  may  or 
may  not  be  widely  diffused,  but  the  control  and  management 
are  unified.  Large  factories  may  or  may  not  have  monopoly 
power;  as  factories  grow  in  si^e,  competition  among  them 
often  becomes  more,  not  less,  complete  and  severe.  On 
And  the  contrary,  monopoly,  as  before  defined,  may  exist  where 

monopoly  ^he  industry  is  small,  as  the  waterworks  in  a  small  town, 
or  a  small  factory  for  making  patented  articles.  In  periods 
of  depression  a  business  with  a  capital  of  ten  thousand 
dollars  may  go  on  and  prosper,  while  one  with  millions  may 
be  forced  into  bankruptcy.  These  three  ideas— great  indi- 
vidual wealth,  large  industry,  and  monopoly  power— are 
often  hopelessly  confused  in  the  discussion  of  present-day 
questions. 

312 


§1]  GROWTH  OF   LARGE   INDUSTRY  313 

2.  Three  industrial  stages  may  be  broadly  distinguished:   stages  of 
that  of  tools,  that  of  machines  and  small  factories,  and  that  JJJjJJJJ^ 
of  large  production.     Men  are  prone  to  forget  that  all  the   industries 
world  is  not  doing  just  as  they  are.    Over  two  thirds  of  the 
people  on  the  globe  are  still  in  the  first  industrial  stage.    One 
billion  people  use  only  tools,  and  have  no  better  source  and 
means  of  power  than  domestic  animals.     This  is  true  in 

the  most  of  Asia  and  Africa,  in  the  greater  part  of  South 
America,  and  in  many  portions  of  North  America.     About 
two   hundred   million   people   live   in  the   stage   of  simple  of  simple 
machines  and  small  factories.     These  are  found  in  eastern  macnmes 
and  southern  Europe,  small  portions  of  South  America,  some 
parts  even  of  the  United  States.     In  this  stage  there  is  not 
enough  manufacturing  power  in  the  community  to  supply 
much  more  than  its  own  needs.    About  two  hundred  million 
people  in  the  United  States  and  western  Europe  have  reached 
the  third  and  highest  industrial  plane,  where  the  highest 
mechanical    devices    are    employed    and    industry    becomes 
highly  specialized.     These  differences  are  broadly  stated;   And  of  large 
there  are   contrasts  within  every  nation.     Three  hundred  industry 
miles  from  here,  in  the  Alleghanies,  people  still  can  be  found 
spinning  and  weaving  and  wearing  homespun  as  in  colonial 
days.     In  a  trip  of  twenty  miles  in  Tyrol  or  Switzerland 
one  can  observe  every  one  of  these  industrial  stages.     The 
most  striking  development,  if  not  the  typical  form,  in  Amer- 
ica to-day  is  large  or  concentrated  industry. 

3.  In  the  last  half  century  the  unit  of  organization  in  Household 
leading  industries  has  tended  to  grow  larger.     Seventy-five  America 
years  ago  a  tool-using  household  industry,  on  farms  and  in 
homes  where  the  greater  part  of  the  things  used  were  pro- 
duced in  the  family,  was  still  the  typical  organization  in 

the  United  States.  The  early  factories  growing  out  of  the 
household  industry  were  small.  A  family  specialized  in  pro- 
ducing cloth  and  exchanged  with  its  neighbors ;  so  with  shoes, 
candles,  soap,  canned  goods,  cured  meats,  etc.  Since  that 
time  two  counter  forces  have  been  at  work  to  affect  the  ratio 


314: 


GROWTH  OF   TRUSTS  AND  COMBINATIONS         LCH.  34 


Recent 
changes  in 
number  of 
factories 


Large 
production 
in  some 
industries 


of  manufacturing  establishments  to  population.  The  number 
of  establishments  has  been  increased  by  specialization  of 
farming  which  has  called  for  many  industries  to  produce 
the  things  once  made  on  farms,  and  by  increasing  wealth 
and  invention,  which  has  made  possible  many  small  indus- 
tries supplying  things  before  almost  unknown.  The  number 
of  establishments  has  been  diminished  as  the  staple  products 
that  can  be  transported  have  come  to  be  made  in  larger 
factories.  The  resultant  of  these  movements  during  the 
thirty  years  ending  in  1900  is  somewhat  surprising :  the  ratio 
of  factories  (with  an  output  worth  five  hundred  dollars)  to 
population  has  somewhat  increased.  In  1870  there  were 
two  hundred  and  fifty-two  thousand  establishments ;  in  1890, 
three  hundred  and  fifty-five  thousand,  and  in  1900,  five  hun- 
dred and  twelve  thousand,  a  ratio  to  population  of  one  to  one 
hundred  and  sixty-two,  one  hundred  and  seventy-seven,  and 
one  hundred  and  forty-four  respectively.  The  last  date  was 
one  of  great  industrial  prosperity,  and  doubtless  many 
ephemeral  enterprises  had  been  called  into  existence,  thus 
giving  a  somewhat  abnormal  result.  Moreover,  there  has  been 
a  large  increase  in  the  number  of  things  made  in  factories 
which  were  formerly  made  in  the  homes,  and  which  then  did 
not  appear  at  all  in  the  census  of  manufactures. 

In  cotton-weaving,  however,  the  unit  of  industry  is  grow- 
ing, factories  in  1870  numbering  nine  hundred  and  fifty- 
six;  in  1890,  nine  hundred  and  five;  in  1900,  one  thousand 
and  fifty-five,  the  later  increase  being  due  to  the  fact  that 
many  new  factories  in  the  South  have  been  started  in  the 
last  decade.  The  population  meantime  doubled.  This  move- 
ment has  been  going  on  for  seventy  years,  there  being  about 
the  same  number  of  mills  in  1900  as  in  1830,  though  popula- 
tion had  multiplied  six-fold.  \  Iron-  and  steel-mills  numbered 
one  thousand  three  hundred  in  1880,  one  thousand  in  1890, 
and  nine  hundred  and  sixty-five  in  1900.  In  industries  having 
local  markets  and  sources  of  supply  for  materials,  the  change 
has  been  less  rapid.  There  were  twenty- four  thousand  grist- 
mills in  1880,  eighteen  thousand  in  1890,  and  twenty-five 


§1]  GROWTH   OF  LARGE  INDUSTRY  315 

thousand  in  1900,  a  change  of  ratio  from  two  thousand  one 
hundred  to  three  thousand  population  per  grist-mill.  There 
were  twenty-six  thousand  sawmills  in  1880,  twenty -two 
thousand  in  1890,  and  thirty-three  thousand  in  1900,  a 
change  from  about  one  thousand  nine  hundred  and  twenty  to 
two  thousand  two  hundred  and  seventy  persons  per  sawmill. 

But  while  the  number  of  establishments  in  these  staple 
industries  was  decreasing,  the  number  of  employees  per  es- 
tablishment in  most  cases  was  increasing.  The  average  in 
all  industries,  in  1870,  was  eight;  in  1890,  twelve;  in  1900, 
ten  and  four  tenths.  In  cotton-mills,  in  1870,  the  average 
was  one  hundred  and  eighty-four ;  in  1890,  two  hundred  and 
forty- four;  in  1900,  two  hundred  and  eighty-seven.  The 
grist-mills,  in  1880,  had  two  and  four  tenths  persons  per 
establishment ;  in  1890,  three  and  four  tenths.  The  sawmills, 
in  1880,  averaged  six  employees  each;  in  1890,  fourteen; 
iron-  and  steel-mills  in  1880,  one  hundred  and  twenty-one 
each;  in  1890,  one  hundred  and  ninety-six. 

4.     The  amount  of  capital  per  establishment  is  tending   Growing 
to  increase  in  the  leading  lines  of  industry.    The  amount  of  ^CQ°tra" 
capital  is  not  so  easy  to  determine  as  the  number  of  em-  capital  into 
ployees,  and  it  is  recognized  that  the  census  figures  on  this  J.^semdus' 
subject  are  only  approximately  correct.     We  are  told  that 
in  cotton-mills,  in  1830,  the  average  capital  invested  was 
fifty  thousand  dollars ;  in  1890,  nearly  four  hundred  thou- 
sand dollars ;   in   1900,   four  hundred   and   forty  thousand 
dollars.    It  is  easy  to  observe  the  large  increase  in  investment 
of  capital  in  flouring-mills  since  the  new  processes  came  into 
use.     The  average  capital  of  all  industries  does  not  grow 
as  in  the  staple  ones,  for  many  smaller  industries  have  come 
into  existence.    In  1880,  the  average  capital  was  eleven  thou- 
sand dollars ;  in  1900,  it  was  eighteen  thousand  dollars. 

The  years  between  1890  and  1900  saw  the  rapid  formation 
of  trusts  and  combinations,  and  of  larger  industries.  Consoli- 
dation took  place  on  a  great  scale  in  railroads  and  in  manu- 
factures. Much  of  this  has  been  of  such  a  kind  that  it  does 
not  appear  at  all  in  the  figures  showing  the  number  of  es- 


316  GROWTH   OF   TRUSTS  AND  COMBINATIONS         LCH.  34 

tablishments  and  of  employees.     Many  discrepancies  appear 
in  the  data  regarding  this  movement  given  by  different  au- 
thorities, as  there  is  no  generally  accepted  rule  by  which  to 
determine  the  selection  of  the   companies   to  be   included 
in  the  lists,  and  as  the  conditions  are  changing  from  day 
to  day.    A  competent  financial  authority  l  gives  the  follow- 
ing  figures   regarding  the   "industrial"   trusts    (manufac- 
Recent         turing  and  commercial)    and  gas  trusts,  organized  in  the 
of™mbina-  United  States  between  1860  and  1899,  not  including  combi- 
tions  nations  in  such  businesses  as  banking,   shipping,   railroad 

transportation,  etc.  The  figures  refer  to  the  reorganization 
and  consolidation  of  industries  into  larger  units,  some  of 
which  have  much  and  others  little  or  no  monopoly  power. 


Decade 

Number  Organized 

Total  Nominal  Capital 

1860-69 

2 

$13,000,000 

1870-79 

4 

135,000,000 

1880-89 

18 

288,000,000 

1890-99 

157 

3,150,000,000 

Total,  40  years  181  $3,586,000,000 

The  number  organized  and  the  capital  represented  by  this 
movement  in  the  last  of  these  decades  are  eight  times  as  great 
as  in  the  thirty  years  preceding.  In  the  last  ten  years  can 
be  traced  the  influence  of  general  industrial  conditions. 

Year  Number  Organized  Total  Nominal  Capital 

1890  6  $82,000,000 

1891  13  168,000,000 

1892  13  140,000,000 

1893  5  226,000,000 

1894  2  35,000,000 

1895  7  104,000,000 

1896  3  40,000,000 

1897  6  93,000,000 

1898  22  574,000,000 

1899  80  1,688,000,000 


Total,  10  years  157  $3,150,000,000 

1  Compiled  from  data  given  by  "The  Journal  of  Commerce  and  Com- 
mercial Bulletin,"  reprinted  in  "The  Commercial  Year  Book,"  Vol.  V, 
1900,  pp.  564-569. 


GROWTH   OF   LARGE   INDUSTRY 


317 


The  first  three  years  enjoyed  great  prosperity  and  the  num- 
ber of  combinations  were  six,  thirteen,  thirteen.  In  1893, 
the  number  was  less,  but  the  total  nominal  capital  (pre- 
ferred and  common  stocks  and  bonds)  was  still  the  greatest 
it  had  ever  been  in  any  year.  Then  came  the  period  of 
depression,  1894-97,  when  both  the  numbers  and  the  capital 
were  comparatively  small.  Then  followed  the  period  of  the 
greatest  formation  of  trust  companies  the  world  has  ever 
seen,  which  extended  from  1898  to  1901,  and  ended  in  1902. 

In  a  list  recently  revised  by  another  authority 1  it  appears  Trust 
that  the  data  for  all  "  industrial  trusts  "   (nearly,  but  not  8tati8tics 
quite,  comparable  with  the  foregoing  figures ) ,  are  in  round 
numbers  as  follows: 


for  1904 


Number  of  Plants 
Date  Number        Acquired  or  Controlled 

Jan.  1,  1904  318  5288 


Total  Nominal  Capital 
$7,246,000,000 


These  figures  would  indicate  that  the  industrial  trusts 
more  than  doubled  within  four  years,  most  of  the  growth 
being  within  three  years.  The  same  authority,  in  a  more 
comprehensive  list,  classifies  in  six  groups  all  so-called 
"trusts"  of  the  United  States,  at  the  date  of  January  1,  1904, 
as  follows  (the  figures  just  given  above  are  the  totals  of  the 
first  three  groups)  : 

No.  of  Plants  Ac- 
Number     quired  or  Controlled 


'  Groups 

1.  Greater    industrial 

trusts 

2.  Lesser      industrial 

trusts 

3.  Other       industrial 

trusts  in  process 
of  reorganization 
or  readjustment 

4.  Franchise  trusts 

5.  Great    steam    rail- 

road groups 

6.  Allied  independent 

railroad  groups 

'Total, 
1  John  Moody, 


298 


13 
111 

6 

10 
445 


1528 


3426 


334 
1336 

790 

250 
8664 


Total  Nominal  Capital 

$2,660,000,000 

4,055,000,000 

528,000,000 
3,735,000,000 

* 

9,017,000,000 
380,000,000 


$20^000,000,000 
The  Truth  About  the  Trusts,"  1904.' 


318 


GROWTH   OF   TRUSTS  AND  COMBINATIONS         [CH.  34 


Economical 
use  of 
machinery 
in  large 
production 


Economy  in 
labor  power 


§  II.   ADVANTAGES  OF  LARGE  PRODUCTION 

1.  A  great  technical  advantage  of  large  production  is  the 
better  and  fuller  use  of  machinery.    A  large  factory  with  a 
large  output  can  keep  a  special  machine  adjusted  for  each 
pattern  and  process,  whereas  in  a  small  factory  much  time 
and  energy  are  wasted  in  adjusting  one  machine  for  various 
processes.     The  machinery  in  a  large  factory  is  thus  more 
fully  utilized.     Compare  the  machinery  used  in  a  large  ax- 
factory   with   that    used   in   twenty-five   small    ax-factories 
having  the  same  total  output:  the  one  hundred  and  fifty 
workmen  in  twenty-five  small  factories  would  use  twenty- 
five  shears,  one  hundred  trip-hammers,  fifty  grindstone-pits, 
fifty  polishing-frames,  a  total  of  two  hundred  and  twenty- 
five  machines;  the  same  one  hundred  and  fifty  men  in  one 
large  factory  would  require  three  shears,  a  saving  of  twenty- 
two;  twenty  trip-hammers,  a  saving  of  eighty;  thirty-seven 
grindstone-pits,    a    saving    of    thirteen;    thirty    polishing- 
frames,  a  saving  of  twenty;  a  total  of  ninety  machines,  a 
saving  of  one  hundred  and  thirty-five  machines.    The  differ- 
ence in  cost  due  to  machinery  is  not  so  great  as  these  figures 
indicate,  as  the  unused  machines  last  longer;  but  in  the 
small  factory  there  is  more  depreciation  from  rust  and  de- 
cay, and  a  larger  proportionate  investment  of  capital  for 
which  interest  must  be  earned.     The  average   amount  of 
stock  and  materials  required  in  a  large  factory  is  not  so 
great  in  proportion  to  the  output. 

2.  In  a  large  factory  the  division  of  labor  may  be  more 
complete  and  effective.    The  technical  economies  of  the  divi- 
sion of  labor  can  be  realized  in  large  measure  only  when  a 
number  of  men  work  together.     Partly  because  of  the  ad- 
vantages in  the  use  of  machinery,  but  partly   from  other 
causes,  labor  in  a  large  group  is  proportionately  more  ef- 
fective than  in  a  small  group,  especially  in  producing  form- 
value.    In  making  plows,  nine  men  working  separately  will 


§HJ  ADVANTAGES  OF  LAKGE  PRODUCTION  319 

average  sixty-six  plows  each  per  year,  while  one  hundred  and 
eighty,  men  working  together  will  average  one  hundred  and 
ten  each  per  year,  the  output  per  man  being  increased  sixty- 
six  and  two  thirds  per  cent.  In  a  rifle-factory  with  a  daily 
output  of  fifty,  eight  men  are  needed  for  the  same  product 
that  can  be  supplied  by  three  men  in  a  factory  with  an  out- 
put of  one  thousand  daily. 

3.  In  the  larger  industry  the  costs  of  management,  super-  Misceiia- 
vision,  and  marketing  are  relatively  less.    Division  of  labor  ^nomies 
decreases  the  difficulty  of  supervision   in   larger  factories, 
where   the  processes  are  divided,   systematized,   and  made 

a  matter  of  routine.  The  necessary  inspection  of  the 
results  is  more  rapid  and  easy.  The  advertising  of  cer- 
tain kinds  of  goods  involves  a  large  and  inevitable 
outlay,  which  is  relatively  less  for  a  larger  business,  as 
the  greater  the  output  the  smaller  the  burden  on  each  unit 
of  the  product.  Combination  effects  a  great  saving  in  the 
number  of  commercial  travelers,  a  result  partly  due  to  the 
decrease  in  competition,  but  partly  also  to  better  organiza- 
tion. Each  of  twenty  different  factories  must  send  its 
drummers  into  every  part  of  the  country  to  seek  business. 
In  combination  they  can  divide  the  territory,  visit  every 
merchant  and  get  larger  orders  at  smaller  cost.  Supplies 
can  be  purchased  more  cheaply  in  large  amounts,  and  ship- 
ments in  car-load  and  train-load  lots  make  possible  special 
(sometimes  illegal)  concessions  from  railroads  and  from  car- 
riers on  waterways. 

4.  There   are   some   disadvantages   in   a   large   industry   Limits  to 
which  put  a  limit  to  the  growth  of  a  single  local  establish-  ^^J 
ment.    There  is  practically  a  limit  to  the  advantages  of  size  factory 
in  a  factory.     When  each  man  is  working  on  the  smallest 
possible  subdivision  of  the  product,  doubling  the  number 

of  employees  will  not  increase  his  skill.  When  the  finest 
machinery  can  be  kept  constantly  in  use,  economy  in  its  use 
has  reached  the  maximum.  As  lar«:e  factories  tend  to  create 
cities  around  them,  land  rises  in  value  and  higher  wages 


320 


GROWTH  OF   TRUSTS  AND   COMBINATIONS         [CH.  34 


Do  not 
necessarily 
limit  con- 
solidation 


must  be  paid  the  workmen.  Small  factories  are  constantly 
seeking  out  lower  rents,  taxes,  wages,  salaries,  cheaper  local 
sources  of  materials,  cheap  though  limited  sources  of  power, 
and  thus  they  compete  successfully  in  many  markets.  The 
point  is  reached  in  the  growth  of  establishments  where  over- 
sight cannot  be  as  perfect  and  complete;  the  eye  of  the 
master  cannot  be  over  all.  The  market  that  can  be  reached 
by  one  factory  is  limited  by  distance,  as  the  cost  of  trans- 
portation finally  offsets  all  the  other  advantages  of  large 
industry. 

It  is  evident  that  most  of  these  reasons  apply  to  a  single 
local  factory  with  far  greater  force  than  to  a  federation 
of  locally  scattered  plants.  It  was  once  believed  that  the 
growing  disadvantages  of  large  industry  would  set  an  early 
limit  to  consolidation.  While  there  is  a  truth  in  this  thought 
not  to  be  overlooked,  the  effects  must  now  be  recognized  to 
be  more  distant  than  was  supposed.  The  limits  to  the  ad- 
vantages of  combination  have  been  removed  by  the  ap- 
plication of  the  federative  plan  which  makes  possible  under 
one  management  the  maximum  of  advantages  with  the  mini- 
mum of  the  disadvantages  in  large  industry.  That  was  the 
discovery  of  the  early  promoters  of  the  trust  movement. 


Trusts  in 
the  legal 
and  the 
popular 
sense 


§  III.       CAUSES   OF   INDUSTRIAL    COMBINATIONS 

1.  Trusts  are  large  combinations  of  capital  with  some 
degree  of  monopoly  power.  The  original,  legal  meaning  of 
the  term  trust  does  not  include  the  idea  of  monopoly.  The 
old  legal  idea  of  a  trust  is  the  confidence  imposed  in  a 
trustee.  The  method  that  was  adopted  by  the  early  com- 
binations was  the  trust  method,  that  is,  they  made  use  of 
this  legal  device:  the  stock  of  the  separate  companies  was 
put  into  the  hands  of  a  board  of  trustees  to  whom  was  thus 
given  the  right  to  control.  As  it  has  been  found  possible 
to  accomplish  the  same  end  without  the  use  of  this  legal 
method,  the  popular  meaning  of  the  word  trust,  as  applied  to 


§111]  CAUSES   OF  INDUSTRIAL   COMBINATIONS  321 

a  monopoly,  no  longer  agrees  with  the  legal  meaning.  The 
word  trust  is  popularly  used  of  any  large  industry,  though 
usually  there  is  connected  with  it  the  idea  of  some  evil  power 
to  raise  prices  to  the  consumers.  A  large  number  of  the 
corporations  called  trusts  have,  however,  little  monopoly 
power,  and  some  have  none  at  all.  They  are  simply  large 
establishments. 

2.  A  strong  reason  for  combination  of  competing  plants  Economies 
is  found  in  the  legitimate  economies  of  large  production.  The   of  combina- 
economies  that  are  possible  within  a  single  factory  may  be 

still  greater  in  a  number  of  combined  or  federated  industries. 
The  cost  of  management,  amount  of  stock  carried,  advertis- 
ing, cost  of  selling  the  product,  may  all  be  smaller  per  unit 
of  product.  A  large  aggregation  can  control  credit  better 
and  escape  loss  from  bad  debts.  By  regulating  and  equal- 
izing the  output  in  the  different  localities,  it  can  run  more 
nearly  full  time.  Being  acquainted  with  the  entire  situa- 
tion, it  can  reduce  the  friction.  A  strong  combination  has 
advantages  in  shipment.  It  can  have  a  clearing-house  for 
orders  and  ship  from  the  nearest  source  of  supply.  The 
least  efficient  factories  can  be  first  closed  when  demand  falls 
off.  Factories  can  be  specialized  to  produce  that  for  which 
each  is  best  fitted.  The  magnitude  of  the  industry  and  its 
presence  in  different  localities  strengthens  its  influence  with 
the  railroads.  Its  political  as  well  as  its  economic  power  is 
increased. 

A  recent  phase  of  corporate  growth  is  the  "integration   integration 
of  industry,"  that  is,  the  grouping  under  one  control  of  a  ofindustry 
whole  series  of  industries.     One  company   may  carry  the 
{  iron  ore  through   all   the  processes   from  the  mine   to   the 
finished ^  product.     A  railroad  line  across  the  continent  owns 
its   own  steamers   for  shipping   goods  to   Asia  or   Europe. 
Large  wholesale  houses  own  or  control  the  output  of  entire 
factories.    The  possibilities  in  this  direction  have  only  begun 
to  be  realized. 

3.  The  men  uniting  to  form  a  trust  always  declare  that 
21 


322 


GKOWTH  OF  TRUSTS  AND  COMBINATIONS         [CH.  34 


Combina- 
tion 

prevents 
competition 


Financial 
gains  of 
combination 


its  formation  is  the  necessary  result  of  excessive  competition. 
The  statement  is  often  true  in  the  sense  that  a  hard  fight 
and  lower  prices  have  preceded  the  formation  of  the  trust. 
But  as  this  excessive  competition  usually  is  for  the  very  pur- 
pose of  forcing  the  combination,  this  explanation  is  a  begging 
of  the  question.  It  is  fallacious  also  in  that  it  ignores  the 
marginal  principle  in  the  problem  of  profits.  Profits  are 
never  homogeneous  from  factory  to  factory,  and  to  those 
that  are  on  the  margin  competition  may  appear  excessive. 
It  is  generally  the  largest  and  strongest  factories,  in  the 
more  favored  situations,  that,  in  order  to  get  rid  of  trouble- 
some competitors,  force  the  smaller,  weaker,  industries  to 
come  into  the  trust.  When,  therefore,  it  is  said  that  com- 
petition is  destructive,  it  may  be  a  partial  truth,  but  more 
likely  it  is  a  pleasantry  reflecting  the  happy  humor  of  the 
prosperous  promoters  of  the  combination. 

4.  Another  strong  motive  for  the  combination  is  the 
profit  to  promoters  and  organizers.  There  are  indirect  as 
well  as  direct  gains  to  the  managers  of  a  large  business. 
There  is  the  gain  from  the  production  and  sale  of  goods 
to  consumers,  and  there  is  the  gain  from  the  financial  man- 
agement, from  the  rise  and  fall  in  the  value  of  stock.  The 
promoters  of  a  combination  often  expect  to  make  from  sales 
to  the  investing  public  far  more  than  from  sales  to  the 
consumer  of  the  product.  A  season  of  prosperity  and  con- 
fidence, when  trusts  and  their  enormous  profits  are  con- 
stantly discussed,  has  an  effect  on  the  public  mind  like  that 
of  the  discovery  of  a  new  El  Dorado,  a  California,  or  a 
Klondike.  Then  is  the  time  for  the  wily  promoter  to  offer 
shares  without  limit  to  investors. 

These  considerations  show  that  the  trust  is  not  simple  in 
its  cause,  nor  in  its  nature.  In  a  sense  the  most  artificial  of 
industrial  arrangements,  in  another  sense  it  is  a  natural 
evolution  of  industry.  More  and  more  it  is  being  recognized 
that  though  it  has  in  it  something  of  evil,  it  has  as  well 
something  of  good,  and  certainly  much  of  the  inevitable. 


CHAPTER  35 
EFFECT   OF   TRUSTS   ON  PRICES 

§  I.       HOW    TRUSTS    MIGHT    AFFECT    PRICES 

1.  The  economist's  task,  strictly  confined,  is  to  explain  Economics 
the  relation  of  trusts  to  prices,  not  to  solve  the  problem  of 

their  political  control.  The  question  of  trusts  is  such  a  large 
one  that  its  discussion  here  must  be  confined  to  those  aspects 
having  close  relation  to  the  central  subject  of  economic 
study,— the  laws  of  value.  These  laws  were  by  the  older 
economists  thought  to  be  true  only  within  the  limits  of  free 
competition.  Seeing  that  in  various  ways  this  freedom  is 
interfered  with  not  only  by  caste,  custom,  organized  labor, 
but  by  patents,  political  privileges,  and  the  power  of  large 
aggregations  of  capital  (in  short  by  all  things  that  check  the 
flow  of  ability  and  of  agents  from  one  industry  to  another), 
the  question  occurs:  Are  the  abstract  laws  of  rents,  profits,) 
and  wages  of  any  significance  or  of  any  help  in  discussing! 
the  great  practical  questions  of  to-day?  Are  not  prices  de- 
termined by  the  personal  whim  of  industrial  despots  who  can 
bid  defiance  to  the  laws  of  price?  The  control  of  trusts  by 
legislative  action  is  largely  a  political  problem,  but  it  must 
be  guided  by  a  correct  economic  analysis.  Proposed  legis- 
lative measures  often  assume  or  imply  that  in  no  way,  di- 
rectly or  indirectly,  is  competition  found  in  the  problem.  It 
should  be  the  aim  of  economic  study  to  make  clear  the  true 
bearing  and  force  of  monopoly  power  in  practical  problems 
of  value. 

2.  The  fundamental  principles  of  market  value  cannot  be 

323 


324 


EFFECT   OF   TRUSTS  ON  PRICES 


[CH.  35 


Limited 
power  of 
trusts 


Monopoly 
and  supply 


changed  by  a  trust;  a  selling  monopoly  can  affect  price  only 
as  it  affects  supply  or  demand.  The  strongest  "  trust  "  yet 
seen  has  not  been  omnipotent.  Many  careless  expressions 
on  the  subject  are  heard  even  from  ordinarily  careful  writers 
and  speakers:  "The  trust  can  fix  its  own  prices,"  "has 
unlimited  control, "  "  can  determine  what  it  will  pay  and  for 
what  it  will  sell."  This  implies  that  trusts  are  benevolent, 
seeing  that  the  prices  they  charge  are  usually  not  far  in 
excess  of  competitive  prices  in  the  past.  Such  a  view  over- 
looks the  forces  that  limit  the  price  a  monopoly  can  charge. 
The  law  according  to  which  the  value  of  products  on  the 
market  is  determined,  is  as  valid  where  there  is  a  trust  as 
anywhere  else.  The  marginal  utility  of  goods  to  the  con- 
sumer determines  the  price  of  any  given  supply.  If  the 
supply  remains  the  same,  no  trust  can  make  the  price  go 
higher.  What  it  gets  in  exchange  are  the  services  or  the 
wealth  of  the  rest  of  the  public.  At  what  rate  can  it  ex- 
change its  products  for  the  products  of  others  (including 
other  trusts.)  ?  The  monopoly  usually  directs  its  efforts  to 
affecting  the  supply,  leaving  the  price  to  adjust  itself. 
(This  is  the  case  of  the  selling  monopoly ;  the  statement  must 
be  adjusted  where  it  is  a  buying  monopoly.)  It  can  affect 
the  supply  either  by  lessening  its  own  output  or  by  intim- 
idating and  forcing  out  its  competitors.  It  is  true  that  this 
logical  order  is  not  always  the  order  of  events.  The  trust 
does  not  first  limit  the  supply,  and  then  wait  for  prices  to 
adjust  themselves ;  it  first  raises  its  prices,  but  unless  it  is 
prepared  to  limit  the  supply  in  accordance  with  the  new 
resulting  conditions  of  demand,  such  action  would  be  vain. 
The  control  of  the  sources  of  supply  is  the  logical  explana- 
tion of  the  higher  price,  even  though  the  limitation  of  supply 
is  effected  later  by  successive  acts  found  necessary  to  main- 
tain the  higher  price. 

Monopoly  price  is  therefore  a  rational  thing,  not  a  mystery 
entirely  out  of  harmony  with  the  simple  law  of  value  laid 
down  for  consumption  goods.  The  trust  works  as  the  magi- 


$1]  HOW  TRUSTS  MIGHT   AFFECT   PRICES  325 

cian  does,  not  as  was  thought  of  old,  in  defiance  of  natural 
laws,  but  in  harmony  with  them  and  by  their  aid.  The 
view  the  public  took  of  the  trusts  was  at  first  medieval. 
That  should  not  be  the  view  to-day. 

3.     The  economies  of  large  production  after  a  successful  Monopolistic 
combination  may  be  divided  in  varying  proportions  among  l^l*^ 
monopolists,  workmen,  and  consumers.     If  the  great  econ-  combination 
omies  of  large  production  are  effected  by  a  new  combination 
which  makes  no  attempt  to  fix  a  higher  price  and  limit  pro- 
duction, where  will  the  fruits  of  these  economies  go?     They 
will  go  first  to  the  owners  of  the  trust,  because,  unless  in- 
spired by  motives  of  philanthropy,  they  have  no  need  to 
lower  prices.    Though  they  are  in  possession  of  special  facili- 
ties, they  will  try  to  secure  as  high  a"  price  as  before.     A 
wider  margin  permits  greater  profits  on  each  unit  without 
limiting  the  output  or  the  sales.     They  may  retain  this  so 
long  as  they  do  not  yield  to  the  temptation  to  increase  the 
output  in  proportion  to  their  new  facilities. 

These  economies,  may,  however,  at  times  inure  to  the  Gains  to 
benefit  of  the  workmen  in  higher  wages  if  they  succeed  by  worl 
any  means  whatever  in  squeezing  the  employers  at  this  time 
of  exceptional  gains.  The  suggestion  has  even  come  from 
employers  that  in  order  to  allay  labor  troubles  there  should 
be  a  union  of  capital  and  labor  to  squeeze  the  consumer,  by 
doing  away  with  all  competition  in  fixing  prices.  This  prop- 
osition to  divide  the  plunder  of  monopoly  has  been  viewed 
approvingly  by  some  leaders  of  organized  labor,  but  it  does 
not  look  especially  alluring  to  the  general  public,  to  which 
is  assigned  the  humble  part  of  paying  the  bill. 

Part  of  the  advantages  will  go  to  the  consumer  whenever  Gains  to 
there  is  a  motive  on  the  part  of  the  large  establishment  to  consumers 
increase  supply  in  order  to  get  a  larger  profit  or  to  forestall 
new  competition.     As  the  improvements  become  matters  of 
public  knowledge,  most  of  the  new  economic  methods  can 
and  will  be  adopted  by  new  enterprisers,  and  other  large 
aggregations  of  capital  will  be  induced  to  come  in  to  reap 


326 


EFFECT   OF   TRUSTS   ON   PRICES 


[CH.  35 


Social 
burden  of 
monopoly 
profits 


The  praise 
and  blame 
for  trust 
prices 


the  benefits.  The  effect,  of  course,  is  an  increase  in  supply 
and  a  lowering  of  prices.  The  fiat  of  the  trust  to  prices  to 
remain  fixed  while  supply  increases  is  as  vain  as  a  mortal's 
commands  to  the  waves  to  be  still.  The  undesigned  result 
of  the  economies  of  large  production,  therefore,  where  con-^ 
trol  is  not  great,  is  to  lower  the  prices  and  to  diffuse  the  ben- 
efits among  the  public. 

4.  //  the  trust  succeeds  in  raising  its  prices  it  gains  at 
the  expense  of  the  community.     If  a  producer  has  some 
monopoly  power,  recognizes  and  uses  it,  his  gain  does  not 
correspond  with  an  increase  in  production.    It  is  taken  from 
those  who  buy  these  products,  it  is  deducted  from  the  psychic 
incomes  of  other  members  of  society.     This  raising  of  prices 
actually  reduces  technical  production,  for  the  output  is  lim- 
ited in  order  to  secure  the  higher  price.     The  probably  less 
urgent  wants  of  the  receivers  of  monopoly  incomes  ar&  grat- 
ified in  place  of  the  probably  more  urgent  wants  of  the 
average  purchaser.    The  result  is  a  decreased  social  income, 
with  an  increase  of  the  inequality  of  distribution.     There  is 
an  analogy  here  with  the  effects  of  trade-unions.     If  the 
trade-union  succeeds  in  forcing  prices  higher  than  the  com- 
petitive prices,  it  gains  at  the  expense  of  the  other  portion 
of  the  community.     But  while  its  gains  appear  to  be  more 
largely  at  the  expense  of  the  richer  elements  of  society,  the 
gains  of  the  trust  are  more  likely  at  the  expense  of  the 
poorer  elements.    If  the  success  of  organized  labor  means  to 
some  extent  a  leveling  up  of  income,  the  success  of  the  trust 
means  a  still   further  inequality.     Hence   a  difference   in 
public  sympathy  in  the  two  cases. 

5.  The  responsibility  for  either  the  rise  or  the  decline  of 
trust  prices  cannot  always  be  determined.    Prices  are  chang- 
ing constantly  under  competitive  conditions.     In  this  active, 
moving  world,  changes  of  demand,  the  exhaustion  of  sources 
of  supply,  new  processes,  expiration  of  patents,  opening  up 
of  new  lines  of  transportation,  affect  prices  in  a  multitude 
of  ways  entirely  independent  of  organization.     Trust-con- 


§11]  HOW   TRUSTS  HAVE  AFFECTED   PRICES  327 

trolled  industries  are  open  to  all  these  influences.  Economic 
forces  cannot  be  isolated  as  can  elements  in  a  chemical 
laboratory,  and,  therefore,  trusts  claim  the  credit  for  all 
the  reductions  of  price  that  have  occurred.  By  such  a 
j  calculation  the  trusts  usually  make  a  showing  of  progress,  as, 
tintil  1896,  for  twenty  years  the  tendency  of  prices  in  most 
'lines  was  downward.  Always  getting  the  highest  price  they 
can  under  the  market  conditions,  they  yet  pose  as  benefac- 
tors. They  would  claim  that  the  economies  possible  only 
under  trust  organization  cause  even  a  monopoly  price  to  be 
less  than  a  competitive  price  would  be.  Critics  of  the  trusts, 
on  the  other  hand,  charge  them  with  causing  all  the  increase 
that  occurs,  and  with  checking  the  decline  in  prices.  The 
critics  compare  the  percentages  of  decline  in  price  during  the 
decades  before  and  after  the  combination  was  formed,  and 
as  it  is  impossible  for  a  geometric  rate  of  decrease  in  price, 
as  a  result  of  improvements,  to  be  long  maintained,  this 
showing  is  very  unfavorable  to  the  trusts.  A  method  has 
been  found,  however,  of  testing,  in  the  case  of  a  few  leading 
industries,  the  effects  they  have  had  on  the  price  of  their 
portion  of  the  productive  process. 

§  II.      HOW    TRUSTS    HAVE    AFFECTED   PRICES 

1.  Examination  of  the  course  of  prices  in  the  case  of  Trusts 
some  notable  trusts  shows  that,  wherever  effective,  they  raisePnces 
raise  prices  above  the  competitive  rate  possible  to  smaller 
production.  The  most  instructive  study  in  the  subject  is  that 
undertaken  by  J.  W.  Jenks  a  number  of  years  ago,  and 
later  developed  by  him  when  working  with  the  Industrial 
Commission  from  1898  to  1900.  Its  results  are  embodied  in 
a  series  of  charts.  It  appears  that  the  price  of  refined  petro- 
leum, in  1871,  was  twenty-five  and  seven  tenths  cents  per 
gallon ;  in  1880,  eight  and  six  tenths  cents ;  in  1887,  seven  and 
eight  tenths  cents ;  in  1900,  seven  and  eight  tenths  cents.  A 
writer  in  the  "  North  American  Review  "  claims  that  this 


•328 


EFFECT   OF   TRUSTS   ON   PRICES 


[CH.  35 


The  oil 
trust 


The  sugar 
trust 


decline  was  due  to  the  economies  accomplished  by  the  Stand- 
ard Oil  Trust.  It  will  be  noticed,  however,  that  prices  fell 
most  rapidly  (from  twenty-five  and  seven  tenths  cents  to 
eight  and  six  tenths  cents)  between  1871  to  1880,  a  period  of 
intense  competition,  when  the  industry  was  new,  and  when 
the  independent  companies,  fighting  for  their  existence,  intro- 
duced many  improvements  and  began  the  construction  of  the 
pipe-lines  that  were  later  secured  by  the  Standard  Oil  Co. 
Despite  this  rapid  decline,  the  smaller  companies  still  could 
have  maintained  a  profitable  business  had  it  not  been  for  the 
ruinous  discrimination  of  the  railroads  against  them.  Be- 
cause of  this,  the  Standard  Oil  Co.,  in  1880,  obtained  almost 
complete  control.  The  price  twenty  years  later  than  that 
date  was  less  than  a  cent  cheaper.  In  the  meantime  the  price 
for  a  time  continued  to  fall.  Competition  was  never  quite 
stilled.  The  small  competitor,  wherever  he  saw  "a  chance, 
has  nibbled  off  a  bit  of  the  tempting  profits.  The  rise  from 
1898  to  1900  was  in  accord  with  that  occurring  in  other 
lines.  A  much  lower  cost  of  production  is  now  possible  to 
the  great  monopoly  with  its  larger  sales  and  more  economical 
methods.  The  by-products,  unknown  at  the  beginning  of  the 
period,  now  yield  large  sums,  yet  the  price  remains  much  the 
same  as  a  quarter  of  a  century  ago.  The  trust  has  suc- 
ceeded in  retaining  a  large  part  of  the  increasing  margin  of 
price  over  cost. 

The  influence  of  the  sugar  trust  may  be  studied  by  what 
is  known  as  the  method  of  differentials.  The  differential  in 
sugar  is  the  difference  between  the  cost  of  the  raw  sugar  and 
the  refined  granulated  sugar.  Raw  sugar  is  the  main  ma- 
terial and  the  principal  fluctuating  item  of  cost  beyond  the 
control  of  the  trust.  Changes  in  the  differential  reflect  the 
changes  in  profits  except  as  modified  by  a  cheapening  of 
the  process.  The  period  from  1880  to  1887  was  one  of  great 
competition.  In  1880,  the  differential  was  one  and  ninety- 
two  hundredths  cents  on  each  pound  of  refined  sugar,  but 
it  fell  steadily  till,  in  1887,  it  had  reached  sixty-four  hun- 


§IIJ  HOW   TRUSTS   HAVE  AFFECTED   PRICES  329 

dredths  cents.  In  the  fall  of  that  year  the  trust  was  formed ; 
and  the  next  year  the  differential  had  risen  to  one  and 
twenty-five  hundredths  cents,  in  1889  to  one  and  thirty-two 
hundredths  cents.  Tempted  by  the  enormous  profits,  the  rival 
refineries  of  Glaus  Spreckel  were  started,  and  with  competi- 
tion the  differential  fell,  in  1890,  to  seventy  hundredths  cents. 
The  rival  factories  were  then  bought  up  and  under  the  new 
combination  the  differential  went  sailing  up  to  one  and  three 
hundredths  in  1892,  and  to  one  and  fifteen  hundredths  in 
1893.  Rival  factories  again  arose  and  competition  grew 
stronger,  reducing  the  differential  to  ninety-four  hundredths 
in  1894.  It  was  in  that  year  that  the  firm  of  Arbuckle 
Brothers  and  Glaus  Doscher  each  opened  a  great  refinery, 
and  in  the  next  year  the  differential  fell  to  fifty  hundredths 
cents.  In  1900,  some  agreement,  the  terms  of  which  were 
unknown  to  the  public,  was  entered  into  by  the  rivals  and  the 
differential  had  risen,  in  March,  1901,  to  ninety-five  hun- 
dredths cents.  In  every  case  the  differential  fell  when  compe- 
tition was  effective  and  went  up  when  monopoly  power  was 
regained. 

The  differential  of  steel-wire  nails  is  the  difference  be-  Thenau 
tween  the  cost  of  the  steel  billets  and  the  price  of  the  wire.  trust 
Between  1890  and  1895  there  was  a  steady  decline  in  the 
differential.  In  1895  was  formed  the  nail  pool,  an  agreement 
to  share  the  profits,  a  form  of  combination.  A  rapid  advance 
took  place,  both  in  the  price  and  in  the  differential.  In 
the  fall  of  1896  the  pool  was  broken  and  then  occurred 
a  fall  in  prices  and  in  the  differential  during  1896-97.  In 
January,  1899,  the  nail  trust  was  formed,  controlling  sixty- 
five  to  ninety-five  per  cent,  of  the  output  of  wire  nails,  and 
a  rapid  advance  occurred  in  the  price  and  also  in  the  dif- 
ferential. 

^  The  tin-plate  industry  practically  had  its  origin  in  the   The  tin- 
United  States,  in  1892,  under  the  McKinley  tariff.    As  com-  plate  *"* 
petition  increased,  prices  and  the  differential  fluctuated  and 
declined.     At  the  end  of  1898  the  tin-plate  company  was 


330  EFFECT   OF   TRUSTS  ON  PRICES  [CH.  35 

formed  and  prices  at  once  started  upward  with  a  rapid 
increase  in  the  differential.  Cause  may,  in  a  measure,  be 
mistaken  here  for  effect.  In  these  cases  the  part  of  the  rise 
in  price  due  to  the  rise  of  materials  is  not  brought  about  by 
the  trust.  The  differential  represents  its  part  of  the  pro- 
ductive process  and  its  source  of  profits.  The  power  to  make 
the  differential  high  is  due  in  part  to  the  general  conditions 
of  business  in  the  last  three  years  considered.  The  profits 
of  all  industries  in  those  years  increased.  While  prices  may 
have  risen  partly  because  the  trust  was  formed,  it  may  have 
been  possible  to  form  the  trust  because  prices  were 
rising.  The  general  conclusion  is  that  trust  prices  are  always 
raised  when,  and  to  the  extent  that,  control  is  secured.  They 
are  lowered  below  normal  prices  when  competition  becomes 
troublesome.  Fluctuation  of  prices  probably  has  been  more 
rapid  and  more  spasmodic  under  trusts  than  it  has  been 
under  ordinary  competitive  conditions. 

2.  A  large  degree  of  monopoly  control  may  lower  the 
incomes  °f  producers  of  materials,  the  value  of  competitive 
plants,  and  prices  in  special  local  markets.  A  strong  sell- 
ing monopoly  tends  to  become  also  a  buying  monopoly.  A 
great  industry  using  great  quantities  of  materials  may  either 
own  the  sources  or  purchase  from  small  producers.  The 
steel  trust  owns  mines,  and  ships  and  railroads  to  bring  the 
ore  to  the  furnaces ;  but  the  tobacco  trust  buys  from  the 
farmers.  If  the  packing,  refining,  and  marketing  of  a 
product  is  monopolized,  the  sellers  of  the  raw  or  partly  fin- 
ished product  are  subject  to  one-sided  competition.  The 
small  producers  of  tobacco,  of  crude  oil,  and  of  anthracite 
coal  claim  that  the  effect  of  the  trusts  is  to  give  them  lower 
prices  for  their  products.  Some  have  been  severely  punished 
by  the  monopolies  for  refusing  to  take  the  first  offer  made. 
Monopoly  is  thus  likewise  able  to  purchase  competing  plants 
at  ridiculously  small  sums,  by  first  making  them  valueless 
through  fierce  price-cutting,  or  by  threats  of  it.  * '  Rich  ' '  is 
often  a  relative  term,  and  it  is  said  that  many  a  small  mil- 


§ii]  HOW  TRUSTS  HAVE  AFFECTED  PRICES  331 

lionaire  producer  has  anxiously  waited  to  see  whether  the 
great  trust  would  next  turn  its  attention  to  him. 

3.     Competition  of  less  capable  producers  works  in  most   Theper- 
cases  to  prevent  the  great  or  continued  rise  of  trust  prices.  ^^ 
Early  trusts  overestimated  their  power.     The  persistence  of  reducing 
competition  in  industries  where  the  trusts  have  had  great  pnces 
advantages  in  position  and  resources  has  been  astonishing. 
The  wall-paper  trust,  though  for  many  years  it  kept  prices 
above    competitive    rates,    was  -repeatedly    undermined    by 
competition.     The  whisky  trust,  while  it  frequently  raised 
prices,  was  as  often  forced  by  the  growth  of  small  distil- 
leries to  lower  them  below  competitive  rates.     Competition 
in  the  oil  industry  has  persisted  under  the  greatest  difficul- 
ties.    The  smaller  companies  have"  hauled  the  product  by 
wagon  when  the  trust  was  moving  it  by  pipe-lines.     The 
continuance  of  high  prices  by  a  trust  depends  on  a  high 
degree  of  control  of  supply.     A  recognition  of  the  limits  of 
their  power  has  led  trusts  in  some  cases  to  a  policy  of 
moderate  prices,  affording  a  good  profit,  but  not  encour- 
aging competition. 

The  limits  of  the  power  of  the  trust  to  control  prices  are  supply  as 
strikingly  shown  by  the  fact  that  it  cannot  even  insure 
low  prices  if  the  market  conditions  do  not  justify  them.  The  prices 
steel  trust,  in  1902-3,  declared  that  it  would  not  advance 
the  price  of  steel  rails  above  twenty-eight  dollars,  and  this 
was  hailed  as  a  beneficent  effect  of  trust  control,  which,  by 
equalizing  production,  could  prevent  excessive  fluctuations 
of  price.  But  the  trust's  declaration  was  a  bit  of  inexpensive 
humor  on  the  part  of  the  managers ;  the  trust  had  nothing  to 
sell  at  the  price  quoted,  as  its  entire  product  had  been  sold 
out  months  in  advance.  While,  therefore,  the  trust  contin- 
ued calmly  to  quote  steel  rails  at  twenty-eight  dollars,  com- 
petition raised  the  market  price  to  thirty-three  dollars  a  ton ; 
twenty-eight  dollars  or  more  was  paid  for  second-hand  rails, 
and  a  proportionate  price  for  other  iron  products.  Such 
exceptional  conditions,  raising  prices  to  abnormal  levels,  are 


332 


EFFECT  OF  TRUSTS  ON  PRICES 


[CH.  35 


Modes  of 

controlling 

trusts 


followed  by  a  decline  disastrous  not  only  to  the  small  pro- 
ducer, but  to  the  trusts  as  well. 

4.  The  control  of  the  trusts  must  be  sought  in  the  direc- 
tion of  maintaining  potential  competition  through  fair  and 
free  conditions  of  industry.  Many  of  the  remedies  suggested 
are  reactionary  and  would  give  up  the  benefits  of  large 
production.  Measures  must  be  sought  in  harmony  with  the 
economic  principles  of  price.  Since  many  of  the  trusts  have 
grown  wealthy  by  special  shipping  privileges  from  the  great 
quasi-public  corporations,  the  railroads,  and  by  special  fa- 
vors from  public  or  corporation  officers,  who  have  been  false 
to  their  duties,  the  solution  must  be  a  political  and  moral 
one;  it  must  be  sought  in  the  development  of  honest  citizen- 
ship and  of  a/more  efficient  social  regulation  of  quasi-public 
industries.  /The  conditions  of  competition  may  be  made 
fairer  by  requiring  publicity  of  accounts,  and  by  making  it 
impossible  for  great  corporations  to  strangle  ^their  local  com- 
petitors by  special  and  temporary  prices.  The  state  here 
has  the  same  duty  to  perform  that  it  has  to  protect  the  weak 
man  from  personal  violence  at  the  hands  of  the  strong. 
This  will  not  prevent  competition,  but  it  will  determine  the 
ways  in  which  the  rivalries  of  men  can  be  manifested.  Any 
measures  for  controlling  the  great  combinations  must  start 
from  a  right  understanding  of  the  law  of  value,  neither  un- 
derestimating nor  overestimating  their  economic  powery 
Public  sentiment  toward  the  trust  question  has  changec 
somewhat  in  recent  years,  because  the  nature  of  trusts  and 
the  extent  of  their  power  are  better  understood.  There  is 
now  less  fear  of  them,  and  more  confidence  that  they  can  be 
tamed  and  made  to  serve  the  welfare  of  society. 


CHAPTER  36 

GAMBLING,  SPECULATION,  AND  PROMOTERS' 
PROFITS 

§  I.      GAMBLING  VS.   INSURANCE 

1.  Many  forms  of  chance  are  inseparable  from  the  indi-  Unavoidable 
vidual  enterprise.  There  are  what  may  be  called  natural  chances 
chances,  arising  from  the  uncertainties  of  the  seasons,  from 
rainfall,  heat,  hail,  storm,  flood,  lightning,  land-slides.  Such  - 
chances  must  be  taken  both  by  the  small  enterpriser  and  by 
the  large.  In  an  earlier  condition  of  society  natural  chance 
almost  dominated  industry,  and  it  still  remains  and  must 
always  remain  an  important  factor  to  deal  with.  There  are 
political  chances,  as  war  and  riot ;  as  legislation  on  money, 
tariffs,  credit,  and  business  relations.  These  are  caused,  it 
is  true,  by  the  action  of  men,  but  it  is  a  collective  action  out 
of  the  control,  to  a  greater  or  less  degree,  of  the  individual 
—absolutely  out  of  the  control  of  most  individuals.  Men  of 
greater  political  influence  can  to  some  extent  control  these 
chances,  possibly  in  their  own  favor.  There  are  chances  of 
carelessness  causing  fire,  explosions,  wrecks  on  misplaced 
switches,  and  involving  penalties  and  losses  that  must  be  met. 
There  is  the  chance  of  physical  or  mental  collapse,  as  the 
sudden  insanity  or  the  sudden  death,  unforeseen  and  un- 
preventable,  of  one  performing  responsible  duties.  Sickness 
often  wrecks  the  plans  and  the  fortune  of  a  whole  family. 
There  are  economic  changes,  such  as  those  in  methods  of  pro- 
duction, in  machinery,  in  methods  of  transportation ;  such  as 
the  growth  of  fashions  or  the  growth  of  population  changing 
demand  in  some  directions  and  for  some  materials. 

333 


GAMBLING  AND   SPECULATIVE   PROFITS 


ICH.  36 


Average  of 
chances  in 
each 
industry 


Other 

chances 

artificial 

and 

avoidable 


Some  of  these  chances  are  more  connected  with  money- 
lending,  others  with  manufacturing;  some  with  agriculture, 
others  with  commerce ;  but  all  are  present  in  some  degree  in 
every  industry.  In  the  broadest  view  they  are  not  chances, 
for  on  the  basis  of  experience  it  can  be  foretold  that  they  will 
occur  to  some  one ;  but  no  individual  can  tell  when  and  how 
they  will  occur  to  him.  A  general  average  of  chances  in  dif- 
ferent lines  of  business  causes  some  to  be  called  safe,  others 
extra-hazardous.  The  chance  is  averaged  and  added  to  the 
profit  or  gain  of  that  industry,  for  an  extra-hazardous  indus- 
try must  in  general  afford  a  higher  average  of  profit  in  order 
to  induce  men  to  engage  in  it.  It  is  folly  to  take  a  risk  with- 
out ascertaining  its  degree,  so  far  as  general  experience 
enables  one  to  choose.  But  inasmuch  and  in  as  far  as  the 
gains  and  losses  fall  unequally  upon  different  individuals, 
income  depends  on  chance. 

2.  The  essence  of  gambling  is  the  attempt  to  gain  by 
taking  chances  that  are  not  the  unavoidable  incidents  of 
productive  enterprise.  The  chances  just  enumerated  are  not 
sought,  but  avoided  as  far  as  possible ;  yet  they  must  be 
borne  by  some  one,  and  the  burden  must  be  distributed 
throughout  society.  There  are  unquestionably  many  kinds 
of  chance-taking  which  differ  from  these  in  economic,  and 
therefore  in  moral  quality ;  but  it  has  taxed  the  ingenuity  of 
philosophers  to  lay  down  an  abstract  definition  of  gam- 
bling that  would  permit  ready  and  certain  distinction  in 
practice  between  gambling  and  legitimate  chance-taking. 
Typical  gambling  is  the  transfer  of  wealth  .on  the  outcome 
of  events  absolutely  unpredictable,  so  far  as  the  two  gam- 
blers are  concerned.  Examples  are  the  shaking  of  unloaded 
dice  or  the  honest  dealing  of  a  pack  of  cards.  There  can  be 
no  doubt  of  the  entire  lack  of  a  productive  economic  basis 
in  the  betting  on  prices  carried  on  in  so-called  bucket-shops 
by  ignorant  persons  having  no  connection  with  the  market 
of  real  things,  and  seeking  to  get  something  for  nothing  as 
a  result  of  mere  chance. 


$1]  GAMBLING  VS.  INSURANCE  335 

Cheating  is  not  a  necessary  mark  of  gambling,  although  cheating 
the  cruder  kinds  of  dishonesty,  such  as  the  loading  of  dice  or 
the  collusion  of  horse-owners  or  of  horse-jockeys  to  deceive 
the  betting  public,  are  so  common  that  they  seem  often  to  be 
its  essential  feature.  Gamblers  recognize  fair  as  opposed  to 
unfair  methods.  Fair  gambling  is  a  kind  of  minor  morality 
within  the  immoral  field  of  gambling,  like  the  honor  found 
among  thieves.  Gambling  bears  somewhat  the  same  relation 
to  legitimate  chance-taking  that  play  does  to  labor.  The 
chance-taking  in  gambling  has  no  useful  purpose  or  result 
outside  itself.  The  gamblers  constitute  themselves  a  little 
fictitious  economic  circle,  and  they  transfer  gains  and  losses 
on  the  turn  of  events  that  have  no  practical  objective  result 
within  their  circle  except  to  determine  the  direction  of  the 
transfer. 

3.     Legitimate  forms  of  chance,  or  risk-taking,  shade  off  various 
into  illegitimate  forms,  or  gambling.    Ranging  between  the  c38680** 

mixed  Dei- 

extremes  of  legitimate  risk-taking  and  of  gambling  are  a  ture;  par- 
number  of  cases  of  a  mixed  nature.     The  bets  made  on  ti8anbets 
college  games,  races,  and  contests  differ  from  ordinary  bets 
only  in  the  added  feature  of  so-called  college  loyalty    (a 
travesty  on  the  real  sentiment).     These  college  gambling 
contracts  are  supposed   (according  to  a  mode  of  reasoning 
found  also  among  primitive  peoples)  to  exercise  a  subtle  and 
irresistible  influence  upon  the  result.     A  crew  that  enters 
the  race  with  the  odds  against  it  is  unnerved  and  undone, 
thinks  the  patriotic  collegian. 

In  nearly  all  wagers,  judgment  in  some  degree  influences  Knowledge 
the  choice  of  sides.    One  man  bets  on  a  horse  whose  pedigree  ^cst^g 
and  performances  he  knows  thoroughly;  another  judges  by  the  result 
the  horse's  appearance  as  it  comes  upon  the  track.     The 
professional  book-makers  have  the  latest  possible  and  most 
exact  information  on  which  to  base  their  bids. 

In  the  bets  made  on  one's  own  prowess,  as  on  speed 
in  running  or  rowing,  or  in  playing  cards  (wherein  also  the 
element  of  pure  chance  is  mingled)  the  chance-taking  is 


336  GAMBLING  AND   SPECULATIVE   PROFITS  [CH.  36 

still  far  over  on  the  uneconomic  side  of  the  border-line.  The 
running  is  for  the  sake  of  the  wager,  not  for  a  useful  pur- 
pose. A  premium  won  by  a  runner  for  speed  in  delivering 
a  message  of  economic  importance  is  in  striking  contrast 
to  the  winnings  in  a  wager. 

Finally,  the  very  border-line  of  difficulty  is  reached  in  the 
purchase  and  sale  of  goods  in  the  market  with  a  view  of 
profiting  by  chance  changes  in  price.  Land  speculation,  the 
purchasing  and  holding  of  lumber,  grain,  cattle,  and  other 
tangible  and  useful  things,  must  be  judged  liberally.  The 
quality  of  gambling  depends  somewhat  on  the  motive  as 
well  as  on  the  ability  of  the  actor.  The  enterpriser  dealing 
with  real  wealth,  and  fitted  to  take  the  risks,  both  because 
of  his  resources  and  of  his  exceptional  knowledge,  needs  the 
motive  of  gain,  and  in  a  sense  can  be  said  to  earn  socially 
what  he  gets.  The  motive  of  the  uninformed  must  be  a  blind 
trust  in  luck,  and  a  hope  to  gain  from  a  rise  in  prices  which 
they  are  quite  unable  to  foresee  or  rationally  to  explain. 

4.  In  its  relation  to  value,  a  bet,  or  wager,  is  the  exchange 
of  the  chance  of  loss  for  the  chance  of  gain,  involving  a 
social  loss.  Even  when  fairest,  the  average  results  of 
such  an  exchange  must  be  unfavorable  to  society.  One 
person  loses  a  part  of  his  income  that  gratifies  relatively 
urgent  wants;  another  gains  something  that  gratifies  only 
less  urgent  wants  than  were  represented  by  the  sum  he 
risked.  The  area  that  is  subtracted  from  the  loser's  psychic 
income  is  larger  than  the  area  added  to  the  winner's  psychic 
income.  The  result  would  be  different  on  the  impossible 
condition  that  it  were  always  the  poorer  man  that  gained 
and  the  richer  one  that  lost.  Betting,  then,  does  not  produce 
wealth ;  it  merely  transfers  ownership  in  a  way  that  reduces 
the  total  want-gratifying  power  of  wealth. 

The  effects  that  gambling  and  betting  have  upon  charac- 
ter are  still  more  important  and  dangerous  than  their  effects 
upon  income.  Motives  of  economic  activity  are  reduced ; 
energy  is  diverted  from  productive  enterprise;  society  is 


$IJ  GAMBLING   VS.  INSURANCE  337 

demoralized  through  dishonesty  of  men  intoxicated  by  gam- 
bling; speculation  and  embezzlement  occur;  and  there  is  a 
reduction  both  of  production  and  of  enjoyment  in  society. 
These  things  can  be  reasoned  out  with  mathematical  cer- 
tainty by  means  of  the  law  of  marginal  utility. 

5.  Insurance  is,  in  outer  form,  a  bet;  but  its  essential  insurance 
purpose  is  the  useful  one  of  equalizing  and  eliminating  * 
chance.  In  its  early  form  insurance  was  a  bet  made  by  a 
ship-owner  to  protect  his  cargo  from  loss.  The  chance  of 
loss  in  shipping  was  even  greater  in  the  Middle  Ages  than 
now,  and  it  became  customary  for  the  ship-owner  to  bet  with 
a  wealthy  man  that  the  ship  would  not  return.  If  it  did 
come  back,  the  owner  could  afford  to  pay  the  bet;  if  it  did 
not,  he  won  his  bet  and  thus  recovered  a  part  of  his  loss.  It 
was  what  is  called  to-day  ' '  a  hedge, ' '  that  is,  one  bet  made 
to  neutralize,  or  offset,  another.  This  gave  to  the  smaller 
merchant  the  advantage  of  distributing  his  losses  over  a 
number  of  voyages,  as  was  done  by  the  owner  of  many  vessels. 
Antonio,  the  wealthy  merchant,  is  made  thus  to  express  his 
security : 

"  My  ventures  are  not  in  one  bottom  trusted 
Nor  to  one  place  ;  nor  is  my  whole  estate 
Upon  the  fortune  of  this  present  year. 
Therefore  my  merchandise  makes  me  not  sad." 

Gradually  there  came  about  a  specialization  of  risk-taking 
by  the  men  most  able  to  bear  it.  They  could  tell  by  ex- 
perience about  what  was  the  degree  of  uncertainty,  and 
could  lay  their  wagers  accordingly.  When  several  insurers 
were  in  the  same  business,  competition  forced  them  to  insure 
the  vessel  and  cargo  of  the  ordinary  trader  for  something 
near  the  percentage  of  risk  involved.  The  insurance  thus 
tended  to  become  a  mutual  protection  to  the  ship-owners; 
what  had  to  be  paid  in  premiums  to  cover  risk  came  to  be 
counted  as  part  of  the  cost  of  carrying  on  that  business. 
Modern  insurance  is  mutual  in  nearly  every  case :  the  total 


338 


GAMBLING  AND  SPECULATIVE  PROFITS 


[CH.  36 


Insurance 
as  mutual 
protection 


Conditions 
of  sound 
insurance 


premiums  equal  the  total  losses  plus  operating  expenses,  the 
interest  on  the  reserve  of  premiums  counting  as  part  of  the 
premium.  Each  one  gets  protection  for  the  loss  of  his 
property  in  return  for  the  payment  of  a  sum  that  will 
cover  the  losses  on  others'  property.  Such  an  exchange  is 
a  profitable  one.  The  premium  comes  from  marginal  in- 
come ;  the  loss  of  house  or  property  would  fall  upon  the  parts 
of  income  having  higher  marginal  utility.  The  less  urgent 
wants  of  the  present  are  sacrificed  in  order  to  protect  the 
income  that  gratifies  the  more  urgent  wants  of  the  future. 
In  insurance  each  party  gives  a  smaller  utility  for  a  greater ; 
each  has  a  margin  of  advantage ;  while  the  greater  certainty 
in  business  stimulates  effort  and  rewards  it.  This  is  quite 
the  opposite  of  the  working  of  betting  and  gambling. 

6.  To  ~be  economically  sound,  insurance  must  have  to 
do  with  real  productive  agents,  and  with  somewhat  regular, 
ascertainable  events  beyond  the  control  of  the  insured.  The 
difficulties  that  arise  in  case  of  fire-insurance  are  due  largely 
to  the  failure  to  meet  these  requirements.  When  the  insured 
sets  fire  to  his  own  buildings,  fire  insurance  ceases  to  be  a 
legitimate  thing.  Constant  efforts  are  made  by  insurance 
companies  to  guard  against  these  "  moral  risks/'  the  least 
calculable  of  any.  Merchants  whose  stocks  have  been  mys- 
teriously burned  two  or  three  times  find  difficulty  in  getting 
insured.  In  life-insurance  it  was  the  custom  formerly  to 
refuse  to  pay  death-losses  in  case  of  suicide;  but  now  that 
condition  is  attached  only  for  the  first  two  or  three  years. 
It  being  reasonable  to  suppose  that  no  man  would  plan 
suicide  years  in  advance,  death  by  one's  own  hand  some 
years  after  taking  life-insurance  is  regarded  as  coming  under 
the  ordinary  rule  of  chance. 


§  II.      THE    SPECULATOR   AS   A   RISK-TAKER 

1.     Every  enterpriser  is  to  some  extent  specializing  as  a 
risk-taker.     This  familiar  idea  may  be  taken  as  a  starting 


ill]  THE  SPECULATOR  AS  A  RISK-TAKER  339 

point  in  discussing  speculation.  In  its  broadest  sense  spec-  An  element 
ulation  means  to  look  into  things,  to  examine  attentively,  Jj^^a" 
study  deeply,  contemplate,  meditate.  In  a  business  sense  business 
the  speculator  is  one  who  studies  carefully  the  conditions 
and  the  chances  of  a  change  of  prices;  hence  arises  the 
thought  that  speculation  is  connected  with  chance.  The 
enterpriser  can  estimate  these  chances  better  than  most  men. 
He  stands  on  a  hilltop  sweeping  the  horizon,  and  can  see 
farther  than  the  workingman  can.  He  relieves  the  other 
agents  of  part  of  the  risk,  and  he  insures  both  laborer  and 
capitalist  against  future  fluctuations  of  prices.  Some  of  the 
profits  of  successful  enterprise  in  countries  where  no  system 
of  regular  insurance  has  grown  up,  and  in  certain  lines  here 
where  no  insurance  is  possible,  are  speculative  gains  of  this 
sort.  Offsetting  them,  however,  in  large  measure,  are  the 
speculative  losses,  by  which  in  many  cases  the  investment 
has  been  swept  away  altogether.  The  cautious  business  man 
tries  to  reduce  chance  as  much  as  possible  by  insurance,  and 
to  confine  his  thought  and  worry  to  the  parts  of  the  produc- 
tive process  where  his  ability  counts  in  the  result.  The 
wise  have  found  out  that  it  is  better  to  shift  the  risk  to  some 
specialist  who  can  take  it  better  than  they.  For  a  man  who 
has  his  thought  and  effort  concentrated  on  running  a  flour- 
mill,  it  is  foolish  to  take  the  risks  of  fire,  of  loss  in  shipment, 
of  a  rise  in  the  price  of  grain  needed  to  fill  outstanding 
orders— it  is  as  foolish  as  it  would  be  for  him  to  make  his 
own  machinery.  Insurance  being  the  economical  way  to 
cover  risk,  the  reckless  will,  in  the  long  run,  be  eliminated 
from  the  ranks  of  enterprisers. 

2.     In  some  lines  the  risk  of  marketing  and  carrying  large  speciaiiza- 
stocks  becomes  highly  specialized,  so  that  ordinary  enter-  risktakin 
prisers  shift  it  to  a  small  group  of  risk-takers.  In  buying  and 
selling  large   quantities  of  produce  there  is  required  the 
closest  and  most  exclusive  attention  of  a  small  group  of 
men.     The  marketing  of  some  staple  products  requires  the 
most  minute  acquaintance  with  world  conditions.     To  fore- 


340  GAMBLING   AND   SPECULATIVE  PROFITS  [CH.  36 

tell  the  price  of  wheat  one  must  know  the  rainfall  in  India, 
the  condition  of  the  crop  in  Argentina,  must  be  in  touch  as 
nearly  as  possible  with  every  unit  of  supply  that  will  come 
into  the  market.  Such  knowledge  is  sought  by  the  great 
produce  speculators  in  the  central  markets.  If  all  means 
of  communication — telegraph,  cables,  mails — are  open  to 
all,  competition  among  these  speculators  becomes  intense,  and 
the  result  is  the  extremest  efficiency.  Their  survival  depends 
on  the  development  of  acute  insight  into  market  conditions. 
It  is  the  testimony  of  expert  witnesses  and  of  writers  in  the 
report  of  the  Industrial  Commission  that  the  margin  at 
which  farm  produce  is  sold  has  fallen  greatly  in  the  last 
few  years.  These  products  are  marketed  along  the  lines  of 
the  least  resistance,  that  is,  of  the  greatest  economy.  The 
function  of  the  commercial  specialists  is  to  foresee  the 
markets,  and  to  ship  to  the  best  place,  at  the  right  time,  in 
the  right  quantities.  If  a  product  shipped  to  Liverpool 
will,  by  the  time  it  arrives  there,  be  worth  more  in  Ham- 
burg, there  is  a  loss.  Such  difficult  decisions  can  be  made 
best  by  a  small  group  of  men  selected  by  competition.  When 
handling  actual  products  they  perform  a  real  economic 
service. 

Produce  3.     Even  some  mere  speculators  on  the  produce  markets 

ma^  an^  ^°  at  ^mes  P^r/orm  a  productive  service  as  risk- 
takers.  Many  of  the  speculators  in  staples,  wheat,  corn, 
wool,  rarely  handle  the  material  things,  the  real  products. 
They  make  it  their  business  to  study  the  world  conditions,  to 
foresee  prices,  and  in  a  sense  to  bet  upon  them.  Regular 
merchants  buy  and  sell  fictitious  products  of  these  men. 
When  a  miller  buys  ten  thousand  bushels  of  wheat  that  will 
remain  in  the  mill  three  months  before  they  are  marketed 
as  actual  flour,  he  at  the  same  time  sells  that  number  of 
bushels  to  a  speculator  for  future  delivery;  or  selling  flour 
for  future  delivery  the  miller  buys  a  future  in  wheat.  In 
either  case  he  cancels  the  chance  of  loss  or  gain,  giving  up 
the  chance  of  profit  in  the  rise  of  wheat  in  exchange  for 


§11]  THE   SPECULATOR   AS  A   RISK-TAKER  341 

protection  from  the  loss  of  the  product  on  his  hands.     To  source  of 
him  this  is  legitimate  insurance,  for  he  is  striving  not  to  le«itilnate 

speculators ' 

create  an  artificial  risk,  but  like  the  medieval  ship-owners,  gain 
to  neutralize  one  that  is  inseparable  from  the  ordinary  con- 
ditions of  his  business. 

One  may  ask,  How,  if  the  miller  in  the  long  run  benefits, 
can  the  speculator  gain  ?  He  does  not  intend  to  perform  this 
service  for  nothing.  Yet  as  the  sales  in  the  whole  market 
equal  the  purchases,  some  say  that  there  can  be  no  profits  to 
the  speculator.  There  are  unsuccessful  speculators  and  at 
any  rate  their  losses  go  to  the  successful  as  a  sort  of  gambling 
profit.  Speculators  do  not  dine  entirely  on  "  lambs  ";  they 
are  anthropophagous.  But,  further,,  the  sales  to  legitimate 
purchasers  should  net  a  gain  to  the  abler  speculator.  In 
proportion  as  his  estimates  are  correct,  there  will  remain 
a  regular  slight  margin  of  profit  to  him.  If  he  agrees  to 
sell  wheat  at  eighty-five  cents  to  be  delivered  in  three 
months,  he  expects  it  to  be  a  little  less  at  that  time.  In  the 
long  run  the  ablest  speculator  probably  buys  at  a  little  less 
and  sells  at  a  little  more  than  the  price  really  proves  to  be. 
This  means  that  the  merchants  in  the  long  run  pay  some- 
thing for  protection  against  changes  in  prices,  just  as  they 
pay  something  for  insurance.  And  yet  this  is  the  cheapest 
way  to  eliminate  risk,  and  a  man  engaged  on  a  large  scale 
in  milling  is,  it  is  said,  at  a  disadvantage  if  he  neglects  this 
method  of  marginal  buying. 

4.     The  buying  of  margins  by  the  "  lambs  "  is  simple  ignorant 
betting,  and  much  manipulation  of  the  market  is  dishonest.  ™**™~ 
What  has  just  been  described  is  the  more  legitimate  phase  speculation 
of  marginal  buying,  not  its  darker  aspect.    One  who,  having 
no  special  opportunities  to  know  the  market,  buys  or  sells 
wheat,   or  other  commodities   or  securities,   on  margin,   is 
called  a  lamb.     He  is  simply  betting.     He  has  no  unusual 
skill;  he  cannot  foresee  the  result.     The  commission  paid  to 
brokers  " loads  the  dice"  slightly;  the  opportunities  of  the 
larger  dealer  of  anticipating  information  load  the  dice  heav- 


342 


GAMBLING  AND  SPECULATIVE  PROFITS 


[CH.  36 


ily  against  the  lambs.  Secret  combinations  and  all  kinds 
of  false  rumors  cause  fluctuations  large  enough  to  use  up 
the  margins  of  the  small  speculator.  At  times  a  number  of 
powerful  dealers  unite  to  cause  an  artificially  high  or  low 
price,  a  situation  called  "  a  corner."  But  this  is  little  other 
than  gambling  between  betters.  The  general  public  gains 
and  loses  little  if  any  by  these  operations,  except  in  the  evil 
effects  they  entail  socially. 


The  pro- 
moter's 
service  to 
the  owners 


The  loss  of 
the  invest- 
ors 


§  in.     PROMOTER'S  AND  TRUSTEE'S  PROFITS 

1.  The  promoter  of  trusts  performs  in  some  ways  a  sub- 
stantial economic  service.    A  promoter  is  one  who  undertakes 
to  convert  a  number  of  unrelated  factories,   or  establish- 
ments, into  a  trust,  or  combination.     He  gets  options  on 
different  factories,  that  is,   the  right  to  buy  them  at  an 
agreed  price  within  certain  time  limits.    He  gets  some  bank- 
ing house  to  underwrite  the  combination,  that  is,  to  agree 
to  dispose  of  a  number  of  shares  to  the  investing  public.    A 
certain  number  of  shares  go  to  the  owners,  a  certain  number 
to  the  banking  house  for  its  services  in  underwriting,  and  a 
substantial  number,  it  may  be  ten  or  twenty  per  cent,  of 
the  enormous  capitalization,  to  the  promoter  himself.     This 
is  payment  for  his  ability  to  water  the  stock  successfully,  to 
capitalize  it  for  more  than  its  former  value.    Evidently  the 
owners  think  he  earns  the  money  or  they  would  not  pay 
him.    So  far  as  there  are  economic  advantages  in  large  pro- 
duction, and  inasmuch  as  there  is  always  friction  in  the 
forming  of  new  industrial  arrangements,   there  is  a  real 
social  service  performed  by  the  promoter.    The__gains^ofthe 
promoter  are  in  part,  the  legitimate  price  of  progress. 

2.  A  large  part  of  the  profits  of  promoter  and  of  owners 
is  unfairly  taken  from  the  investor.  The  larger  modern  busi- 
ness is  less  and  less  attached  to  particular  neighborhoods. 
A  much  smaller  proportion  of  investments  is  made  in  indus- 
tries which  the  investor  himself  can  control  or  even  see  in 


§lll]  PROMOTER'S  AND  TRUSTEE'S  PROFITS  343 

operation.  Business,  therefore,  in  these  days  is  done  largely 
on  faith  in  other  men.  Especially  the  investor  takes  great 
chances.  The  prospectus  announcing  a  reorganization  is 
frequently  misleading.  It  frequently  misrepresents  the 
sources  of  income  and  the  probable  dividends,  conceals  essen- 
tial facts,  and  makes  misleading  statements.  The  capital- 
ization often  is  absurdly  high,  compared  with  the  value  of 
the  different  establishments.  In  one  case  eight  million 
dollars  of  stock  were  issued  to  represent  factories  whose 
combined  value  hadjbeen  five  hundred  thousand  dollars. 
So  far  as  the  capitalization  is  based  on  the  increased 
profits  due  to  the  monopoly  power,  the  profits  of  reor- 
ganization are  taken  out  of  the  pockets  of  the  public. 
But  in  fact  even  monopoly  earnings  cannot  support  such 
valuations,  and  from  the  outset  if  fair  dividends  are  paid, 
they  are  falsely  paid  out  of  capital,  not  out  of  earnings. 
With  the  approach  of  bad  times  there  must  be  a  suspension 
of  dividends,  a  fall  in  the  value  of  securities,  and  a  loss 
falling  upon  the  investors.  Such  practices  are  a  serious  evil, 
for  the  stability  of  industry  depends  on  the  opening  up  of 
opportunities  for  safe  investment  to  the  average  man. 

3.  Corporation  officers  and  trustees,  speculating  in  the  Thespecu- 
stocks  of  their  own  companies,  are  reaping  illegitimate  gains.  ^ing  trus 
It  is  recognized  by  public  sentiment  and  in  law  that  for 
public  officials  to  let  contracts  to  themselves  is  bad  morals 
and  bad  public  policy.  It  is  the  duty  of  legislators  not 
to  make  laws  for  companies  in  which  they  are  interested. 
One  of  the  greatest  scandals  in  American  public  life,  "  the 
Credit  Mobilier  affair,"  was  caused  by  the  acceptance  by 
members  of  Congress,  virtually  as  a  gift,  of  shares  in  a  com- 
pany that  was  seeking  favoring  legislation.  Such  action 
must  be  looked  upon  as  a  sort  of  industrial  treason,  compar- 
able to  the  old  form  of  political  treason.  Corporation  officers 
are  in  a  position  of  public  trust  toward  the  investors  quite 
comparable  to  that  of  government  officers  toward  the  citi- 
zens. The  power  of  directors  and  of  other  officers  to  manip- 


344  GAMBLING  AND   SPECULATIVE   PROFITS  [CH.  36 

ulate  earnings  and  dividends,  and  thus  to  affect  the  market 
value  of  the  stock,  leaves  the  investing  public  helpless.  The 
practice  by  officials  in  great  corporations  of  speculating  in 
their  own  stocks,  whose  prices  they  can  manipulate,  is  so 
common  as  scarcely  to  attract  comment.  Large  fortunes 
result  from  this  betrayal  of  the  trust  imposed  by  the  share- 
holders. This  is  not  legitimate  speculation ;  it  is  like  loading 
the  dice,  pulling  the  horse,  drugging  the  pugilist— things 
despised  and  condemned  even  in  gambling  and  sporting 
circles. 

TWO  types  It  appears,  therefore,  that  in  the  complex  conditions  of 
m°dern  business  there  is  a  legitimate  concentration  of  risk 
in  the  more  capable  hands,  but  also  a  growth  of  opportuni- 
ties for  illegitimate  speculation  and  for  large  dishonest 
gains  that  were  not  possible  before.  These  two  types  of 
speculation  should  be  distinguished,  as  far  as  possible,  in 
thought  and  in  practice ;  but  this  it  not  easy  in  concrete  in- 
stances, which  vary  almost  indistinguishably  from  the  clear 
case  of  honest  earnings  to  the  other  extreme  of  illegiti- 
mate gains. 


CHAPTER  37 
CRISES    AND    INDUSTRIAL    DEPRESSIONS 


§  I.       DEFINITION    AND    DESCRIPTION    OF    CRISES  ^/ 


1.     In  a  broad  sense,  a  crisis  is  a  decisive  moment  or  /Broader 

|  J^ 


turning  point;  hence,  in  industry,  a^  collapse  of  prosperity.  011  of 

In  the  course  of  a  fever  the  crisis  is  the  point  where  there  is 

a  turn  for  the  better  or  for  the  worse.    The  figure  of  speech 

as  applied  to  industrial  conditions  would  seem  to  fail,  in 

that  what  precedes  is  apparently  exuberant  health,  not  dis- 

ease.    Business  conditions  do  not  move  along  uniformly. 

There    are   waves    of   prosperity.      Profits    are    apparently 

great,  then  may  be  suddenly  swept  away.     The  profits  of 

the  prosperous  time  are  partly  illusory,  or  exist  only  on 

paper.    The  situation  has  all  the  unhealthiness  of  the  fever- 

patient.    Men  trade  in  promises  and  when  the  crisis  comes, 

they  have  only  promises  for  profits.    The  discussion  of  busi- 

ness  management   and  profits   is  not  complete  without   a 

consideration  of  this  rhythmic  movement  of  confidence  and 

prices. 

A  crisis  in  the  business  affairs  of  an  individual,  in  the 
sense  of  a  collapse  of  prosperity,  may  occur  from  many 
mischances.  A  local  crisis  may  be  felt  in  some  one  neighbor- 
hood as  a  result  of  flood,  of  fire,  or  of  other  accidents.  Such 
a  case  was  that  which  occurred  in  1864,  in  Manchester, 
England,  when  the  cotton  factories  were  compelled  to  close 
because  the  supply  of  cotton  was  cut  off  by  the  blockade  of 
the  ports  of  the  South  in  the  Civil  War.  Such  a  local 
crisis  sometimes  results  from  a  change  of  transportation, 

345 


346 


CRISES  AND  INDUSTRIAL  DEPRESSIONS 


[CH.  37 


Various 
types  of 
crises 


Industrial 
conditions 
preceding  a 
crisis 


throwing  a  town  out  of  the  line  of  trade.  These  have  been 
mentioned  in  discussing  chance  and  risk;  but  the  phenom- 
enon known  generally  as  an  industrial  crisis  is  of  wider 
extent  and  of  a  more  peculiar  nature. 

2.  In  a  more  special  sense  a  financial  crisis  is  the  confu- 
sion and  loss  that  mark  the  end  of  a  period  of  rising  prices; 
an  industrial  depression  is  the  period  of  hard  times  that 
follows.    The  word  crisis  suggests  a  brief  period,  a  moment, 

I  something  that  is  severe,  sudden,  and  soon  over.  The  term 
financial  panic  is  frequently  used  as  a  synonym  for  financial 
crisis.  A  crisis  in  the  narrower  sense  has  to  do  with  prices — 
is  always  connected  with  money  in  some  way..  While,  there- 
fore, crises  may  be  divided  into  industrial,  speculative,  and 
financial,  according  to  their  immediate  occasion,  all  of  them 
are  financial  in  the  sense  that  they  have  to  do  with  a 
change  in  the  general  price  level.  A  crisis  is  a  jolt  to  prices 
which  shatters  the  credit  of  some  banks,  brokers,  merchants, 
and  manufacturers.  Crises  are  thus  peculiar  to  the  money 
economy  and  to  a  developed  industry.  Not  every  business 
misfortune  is  to  be  called  an  industrial  crisis,  but  only  those 
where  prices  and  credit  are  generally  depressed.  A  long 
period  of  hard  times  is  sometimes  called  a  crisis,  but  it  is 
better  to  distinguish  it  by  the  term  industrial  depression. 

3.  The  period  leading  up  to  a  crisis  is  one  of  general 
prosperity.     Industry  in  successive  decades  does  n6t  pass 
through  an  unvarying  series  of  changes,  but  history  repeats 
itself  with  sufficient  regularity  to  justify  the  view  that  a 
certain  series   of  changes   is  typical   in  modern  industry. 
When  prices  are  at  the  lowest  point  many  factories  are 
closed,  and  much  labor  is  unemployed.    Conditions  are  worse 
in  some  industries  than  in  others.     General  economy  and 
great  caution  prevail;  few  new  enterprises  are  undertaken. 
To  those  having  available  money  this  is   a  good  time  to 
buy,  and  property  begins  to  change  hands.     Then  hoarded 
money   begins  to   come   out   of   its   hiding-places.     Money 
flows  in  from  other  countries,  particularly  if  business  condi- 


5 1]  DEFINITION  AND  DESCRIPTION  OF  CRISES  347 

tions  are  better  abroad  than  here,  for  fow  prices  make  a 
country  a  good  place  in  which  to  buy.  At  the  same  time 
that  the  money  in  circulation  thus  increases,  there  is 
a  general  return  of  confidence  that  increases  credit.  Not 
only  are  there  more  dollars,  but  each  does  more  work.  Then 
old  enterprises  are  resumed  and  new  ones  are  undertaken. 
The  purchase  of  materials  in  larger  quantities  causes  a  rise 
in  prices  and  an  increase  in  costs.  The  surplus  labor  on  the 
margin  of  efficiency  gets  employment,  and  wages  begin  to 
increase.  The  only  classes  not  sharing  in  this  improvement 
are  the  receivers  of  fixed  incomes.  As  prices  rise,  the  pur- 
chasing power  of  their  incomes  gradually  falls. 

4.  The  crisis  is  a  moment  of  widespread  loss,  which  is  The  crisis 
followed  ~by  a  long  period  of  small  profits  to  most  enterprises,  Jjjjjjjj 
and  of  enforced  economy.  As  prices  cease  to  go  up  rapidly, 
the  question  arises  in  many  minds  whether  the  movement 
can  continue,  and  if  not,  when  it  will  cease.  Men  wish 
to  hold  on  for  the  last  profits,  and  are  willing  to  risk 
something  to  gain  them.  When  foreign  prices  do  not  rise 
in  as  great  proportion  as  domestic  prices,  foreign  imports 
are  stimulated  and  the  quantity  of  exports  falls.  This  dis- 
turbs the  equilibrium  of  money  and  requires  at  length  large 
and  continued  exportation  of  specie.  This  checks  prices, 
and,  reducing  the  specie  reserves  of  the  banks,  compels  them 
to  be  more  cautious.  The  fall  in  the  value  of  many  stocks 
and  securities  held  by  the  banks  forces  many  brokers 
and  speculators  to  convert  their  resources  into  ready 
money.  This  is  the  moment  of  danger;  weak  enterprises 
find  their  foundations  crumbling,  and  there  are  many  fail- 
ures. The  falling  prices,  the  shattered  credit,  and  the  finan- 
cial losses  force  many  factories  to  close;  many  workmen 
are  thrown  out  of  employment,  and  business  must  again 
enter  upon  a  period  of  retrenchment,  for  it  has  completed 
the  cycle  of  changing  prices. 


348 


CRISES  AND  INDUSTRIAL   DEPRESSIONS 


[CH.  37 


No  financial 
crises  in  the 
Middle  Ages 


European 
crises  of  the 
eighteenth 
and  nine- 
teenth 
centuries 


§  II.       CRISES  IN  THE  NINETEENTH   CENTURY 

1.  The  periods  of  industrial  hardship  in  the  Middle  Ages 
were  connected  with  adverse  conditions  of  production,  not 
with  the  collapse  of  prices.    Periods  of  exceptional  hardship 
in  medieval  times  were  mostly  due  to  political  oppression, 
famine,  wars,  pestilence,   and  scourges  of  nature.     There 
being  very  little  of  the  money  economy,  there  was  no  devel- 
opment of  credit  and  of  credit  prices.    The  money  economy 
began,  as  has  been  noted,  in  the  cities.    As  the  use  of  money 
spread,  as  larger  commercial  enterprises  were  undertaken,  as 
borrowing  and  the  payment  of  interest  became  common, 
there  began  to  appear  in  city  trading  circles,  on  a  small 
scale,  the  phenomena  of  the  modern  crisis. 

2.  In  Europe  general  industrial  crises  date  from  1763 
and  have  occurred  at  more  or  less  regular  intervals  since. 
It  frequently  is  said  that  the  cycle,  or  period,  of  crises  is  ten 
years,  but  it  taKes  an  elastic  imagination  to  find  support 
for  this  in  history.     The  crises  of  the  eighteenth  century 
occurred  in  1763,  1783,  1793,  these  dates  marking  the  close 
of  wars  of  some  magnitude.    The  crises  were  not  widespread 
or  general,  but  were  more  marked  in  England,  which  was 
most   developed   industrially   and   in   its   money   economy. 
Likewise  in  the  nineteenth  century,  the  crises  were  of  une- 
qual force  in  the  various  countries,  usually  being  severer 
in   England.     The   English   crises  may  be   roughly   dated 
1803,  1825,  1838,  1847,  1857,  1864,  1875,  1890.    These  were 
attributed  to  various  causes;  that  of  1825  to  over-trading 
abroad;  that  of  1847  to  railroad-building;  that  of  1864  to 
the  interruption  of  the  cotton  trade  and  of  commerce,  as  a 
result  of  the  Civil  War  in  America.    While  in  many  parts  of 
England  the  crisis  of  1864  was  unusually  severe,  in  other 
countries  it  was  of  little  moment.     Germany,  after  several 
years  of  great  speculative  prosperity,  had   a  most  severe 
crisis  in  1875;  while  France  (a  somewhat  significant  fact), 


$11]  CRISES  IN  THE  NINETEENTH  CENTURY  349 

although  prostrated  by  the  war  of  1870-71,  losing  a  large 
amount  of  wealth,  and  paying  a  thousand  millions  of  dollars 
to  Germany  as  a  war  indemnity,  escaped  a  commercial  crisis 
almost  entirely  at  that  time. 

3.  In  the  United  States  there  have  been  five  marked  crises  in 
crises:  the  first  in  1817,  the  last  in  1893.  These  crises  were  ^f*6 
of  date  1817-20,  1837-39,  1857,  1873,  1893.  Major  crises 
thus  occurred  about  twenty  years  apart,  and  minor  crises 
in  several  instances  alternated  with  them,  notably  in  1866, 
1884,  and  we  might  add,  1903.  These  crises  were  the  cul- 
mination of  different  kinds  of  speculation,  usually  spoken 
of  as  their  causes.  The  crisis  of  1817  was  due  to  over-trading 
and  to  the  immense  importation  following  the  war  of  1812 
and  the  resumption  of  commerce  with  Europe  in  1816.  In 
1837-39  came  in  quick  succession  two  crises,  not  quite  dis- 
tinct from  each  other,  the  second  similar  to  the  relapse  of  a 
fever  patient.  The  immediate  occasions  were  over-specula- 
tion in  lands,  a  great  issue  of  bank  money,  national  expan- 
sion, and  over-confidence,  possibly  in  some  degree  the  heed- 
less financial  measures  of  Andrew  Jackson.  The  crisis  of 
1857  followed  a  period  of  great  prosperity  marked  by  the 
discovery  of  gold  in  California  in  1848,  by  great  expansion 
of  commerce,  by  the  building  of  railroads,  and  by  a  great  in- 
crease in  foreign  trade.  The  crisis  of  1873,  probably  the 
severest  in  our  history,  is  attributable  to  great  speculation, 
especially  to  railroad-building  on  an  unexampled  scale  fol- 
lowing the  war.  The  blow,  when  it  fell,  was  intensified  by 
the  contraction  of  currency  leading  to  the  return  to  a  specie 
basis  and  lower  prices.  The  crisis  of  1884,  a  comparatively 
slight  one,  occasioned  (rather  than  caused)  by  the  discus- 
sion of  the  money  question,  was  followed  by  some  years 
of  noticeable  depression.  The  years  1889  to  1892  witnessed 
a  prosperity  that  culminated  in  a  crisis  in  September,  1893, 
(likewise  generally  explained  as  due  to  the  unsettled  state 
of  our  monetary  system)  followed  by  a  period  of  depression 
lasting  until  1897. 


350  CRISES  AND  INDUSTRIAL  DEPRESSIONS  [CH.  37 

The  period  from  1897  to  1903  has  been  marked  by  great 
prosperity  and  by  rising  prices.  The  over-hasty  prophecies  of 
collapse  in  the  last  two  years  have  thus  far  been  falsified,1 
but  there  is  now  a  general  feeling  of  distrust  in  investing 
circles.  Already  there  has  been  a  reduction  of  dividends 
in  leading  industries,  and  here  and  there  a  fall  in  the  value 
of  stocks.  High  prices  have  greatly  checked  building.  The 
great  credit  advances  made  on  "  industrials,"  the  stocks  of 
manufacturing  corporations,  are  one  of  the  main  sources  of 
danger.  Caution,  however,  has  been  learned  by  experience ; 
the  banking  interests  are  more  closely  coordinated  and  give 
better  mutual  support  than  in  the  past,  and  a  considerable 
decline  in  stocks  has  already  occurred  without  as  yet  affect- 
ing general  prices  of  commodities.  Various  novel  features 
in  the  situation  make  prophecy  difficult,  but  a  period  of 
liquidation  and  lower  prices  appears  to  be  at  hand. 
General  4.  Irregular  in  time,  and  unlike  in  their  immediate  occa- 

sions,  crises  show  some  general  features.  The  chief  of  these 
are  told  in  the  brief  story  of  the  course  of  prices.  Crises 
are  less  severe  in  countries  with  less  developed  money  and 
credit  systems.  They  are  harder  in  the  United  States  and 
England  than  in  Germany,  harder  in  Germany  than  in 
France,  harder  in  western  Europe  than  in  eastern  Europe, 
harder  in  Christendom  than  in  heathendom.  They  are  less 
severe  in  rural  districts,  where  prosperity  depends  more  on 
crop  conditions,  and  business  has  in  it  less  of  financial 
speculation.  Their  effects  are  least  felt  in  the  staple  indus- 
tries, for  when  hard  times  come,  people  economize  on  the 
less  essential  things.  The  glove-factory,  the  silk-factory,  the 
golf -club-factory  are  more  likely  to  close  than  the  flouring- 
mill.  They  are  felt  less  by  classes  with  fixed  incomes  than 

1  These  statements  are  retained  as  they  were  made  in  March,  1903.  In 
the  following  September  occurred  a  very  remarkable  panic  in  stocks 
which  had  the  minimum  of  effect  on  general  business.  While  stock 
prices  have  somewhat  recovered  since  that  time,  general  business  con- 
ditions, on  the  whole,  tended  for  a  while  toward  the  worse  until  the 
spring  of  1904. 


§111]  VARIOUS  EXPLANATIONS  OF  CRISES  351 

by  those  with  variable  ones.  They  affect  wages  and  salaries 
less  than  profits.  The  rate  of  wages  is  affected  only  in  a 
moderate  degree,  but  laborers  suffer  in  the  loss  of  employ- 
ment. The  money-lender  who  has  eliminated  chance  as  far 
as  possible  and  has  taken  a  low  rate  of  interest  loses  little; 
the  risk-taker  who  draws  his  income  from  dividends  on  stock 
probably  loses  much. 


§  III.      VARIOUS   EXPLANATIONS    OP    CRISES 

1.     Over-production  and  underconsumption  theories  are  Glut 

theor 
crises 


those  most  widely  held.     In  the  first  annual  report  of  the  theones 


United  States  Commissioner  of  Labor  (1886)  is  given  a  long 
list  of  theories,  more  or  less  wild,  that  have  been  advanced 
in  explanation  of  crises.  It  is  simply  a  catalogue,  not  a  log- 
ical grouping.  Most  of  the  views  can  be  classed  as  under- 
consumption or  over-production  theories,  which  are  but  two 
aspects  of  the  same  idea.  One  view  is  that  too  many  things 
are  produced,  another  that  too  few  are  consumed.  The 
over-production  theorist,  seeing  that  warehouses  are  filled 
with  goods  that  cannot  be  disposed  of  for  what  they  cost, 
that  factories  are  shut  down  and  men  are  out  of  employment 
for  lack  of  demand,  declares  that  productive  power  has 
grown  too  great.  The  under-consumption  theorist,  seeing  the 
same  facts,  says  that  the  trouble  is  lack  of  purchasing  power. 
He  admits  that  there  are  people  who  would  like  to  buy  these 
things,  but  he  asserts  that  such  people  lack  money  because 
production  grows  faster  than  wages,  wages  being  fixed,  as 
he  believes,  by  the  minimum  of  subsistence— a  theory  akin 
to  the  iron  law  of  wages.  In  both  over-production  and 
under-consumption  theories  the  inequality  of  demand  and 
supply  is  looked  upon  as  a  general  one.  There  is  supposed 
to  be  not  merely  an  unequal  and  mistaken  distribution  of 
production,  but  a  general  excess  of  productive  power. 

The  wide  vogue  held  by  these  views  would  justify  a  fuller  Defects  of 
discussion  and  disproof  of  them  here,  did  space  permit.    It  «luttheones 


352 


CRISES  AND   INDUSTRIAL   DEPRESSIONS 


[CH.  3-i 


Money 
theories  of 
crises 


Their 
inadequacy 


must  suffice  to  indicate  merely  that  they  have  the  same 
taint  of  illogicalness  as  the  " fallacy  of  waste,"  the  "fallacy 
of  saving"  and,  still  closer  likeness,  the  "fallacy  of  lux- 
ury." They  overlook  the  fact  that  an  income,  either  of 
money  or  of  other  goods,  coming  even  to  the  wealthiest,  will 
be  used  in  some  way.  It  may  be  used  either  for  immediate 
consumption  or  for  further  indirect  use  in  durable  form. 
Through  miscalculation  there  may  be,  at  a  given  moment,  too 
many  consumption  goods  of  a  particular  kind,  but  the  du- 
rable applications  can  find  no  limit  until  the  inconceivable 
day  when  the  material  world  is  no  longer  capable  of  im- 
provement. At  the  time  of  a  crisis,  there  is  unquestionably 
a  bad  apportionment  of  productive  agents,  and  a  still  worse 
adjustment  of  their  valuations,  but  these  in  no  wise  negative 
the  basic  economic  fact  of  the  scarcity  of  wealth. 

2.  Another  group  of  theories  explains  the  crises  as  being 
due  to  money,  either  too  much  or  too  little.  The  unregu- 
lated issue  of  bank-notes  has  been  assigned  as  the  cause  of 
crises,  especially  under  the  circumstances  accompanying 
such  crises  as  those  of  1837  and  1857  in  America,  when 
bank-note  issues  chanced  to  be  the  agency  most  marked  in 
the  undue  and  unsound  expansion  of  credit.  The  issue  of 
government  paper  money,  leading  to  inflation  and  specula- 
tion, is  assigned  as  a  cause  leading  up  to  such  a  crisis  as  that 
of  1873,  following  our  Civil  War.  The  reverse  view  is  taken 
by  the  advocates  of  a  cheap  and  plentiful  money.  They  say 
that  these  crises  were  caused,  not  by  the  expansion,  but  by 
the  reduction  of  bank-notes;  for  example,  not  by  the  infla- 
tion of  prices  through  the  issue  of  greenbacks  in  1862  to 
1865,  but  by  the  contraction  of  the  currency  from  1866 
to  1873. 

There  is  only  a  fragment  of  truth  in  these  various  views. 
It  is  always  lack  of  money  at  the  moment  of  the  crisis  that 
causes  any  particular  failure,  and  in  that  sense  it  is  always 
lack  of  money  that  causes  a  crisis.  But  the  question  is, 
whether  in  any  reasonable  sense  it  can  be  said  that  it  was 


§HI]  VARIOUS  EXPLANATIONS  OF  CRISES  353 

lack  of  a  circulating  medium  before  the  crisis  that  brought 
it  on.  There  is  no  support  for  this  view,  except  in  the  rare 
case  when  the  money  standard  is  undergoing  a  rapid  change, 
as  in  the  United  States  from  1866  to  1873,  and  the  statement 
then  needs  much  modification  and  explanation.  The  money 
theories  of  crises  are  nearer  to  the  truth  than  are  the  over- 
production type,  for  the  crisis  is  always  connected  with 
money  and  prices.  But  it  cannot  be  said  that  the  absolute 
amount  of  money  in  circulation  in  the  period  preceding 
crises  gives  occasion  to  them.  In  a  few  instances  a  rapid 
change  in  the  amount  has  had  an  important  effect,  but  this 
fact  does  not  explain  crises  in  general. 

Lack  of  confidence  is  said  to  be  a  cause  of  crises.  This 
is  a  truism,  but  the  lack  of  confidence  is  not  without  reason 
and  cause.  Over-confidence  in  the  period  of  expanding 
prices  is  succeeded  by  extreme  depression  when  many  false 
hopes  are  shattered. 

3.  Crises  must  ~be  explained  essentially  as  the  forcible  capitaiiza- 
and  sudden  movement  of  readjustment  in  the  mistaken  ^f^^17 
capitalization  of  productive  agents.  Capitalization  runs 
through  all  industry.  The  value  of  everything  that  lasts 
for  more  than  a  moment  is  built  in  part  upon  rents  that  are 
not  actual,  but  expectative,  whose  amount,  therefore,  is  a 
matter  of  guesswork,  or  "  speculation. "  Many  unknown 
factors  enter  into  the  estimate  of  future  rents.  The  uni- 
versal tendency  to  rhythm  in  motion  (material  or  psychic) 
manifests  itself  in  an  overestimate  or  underestimate  of  rent 
and  of  every  other  factor  in  value.  This  is  emphasized  by 
a  psychological  factor  called  the  "hypnotism  of  the  crowd." 
Most  men  follow  a  leader  in  investment  as  in  other  things. 
The  spirit  of  speculation  grows  till  it  becomes  almost  a 
frenzy,  and  people  rush  toward  this  or  that  investment, 
throwing  capitalization  in  some  industries  far  out  of  equi- 
librium with  that  in  others. 

The  use  of  credit  enhances  the  rhythm  of  price.  A  large 
part  of  business  is  done  practically  on  margins.  If  the  value 


354 


CRISES  AND   INDUSTRIAL  DEPRESSIONS 


[CH.  37 


Psychologi- 
cal nature 
and  objec-  J 
tive  condi-fjj 
tions  of 
crises        I 


Widespread 
effects  on 
incomes 


of  a  thing  fully  paid  for  falls  in  the  hands  of  the  owner, 
he  alone  loses;  but  if  the  value  of  a  thing  only  partly  paid 
for -falls  so  much  that  the  owner  is  forced  to  default  in  his 
payment,  the  loss  may  be  transmitted  along  the  line  of 
credit  to  every  one  in  the  series  of  transactions.  A  credit 
system,  highly  developed,  is  a  house  of  cards  at  a  time  of 
financial  stress.  There  is  an  element  of  credit  in  all  modern 
business.  Enterprisers  enter  into  strenuous  rivalry  to  secure 
the  profits  of  a  rise,  ever  hoping  to  get  out  whole  before  the 
crisis  comes. 

The  fundamental  cause  of  crises  thus  is  seen  to  be  psycho- 
logical; it  is  the  rhythmic  miscalculation  of  rents  and  of 
capital  value,  occurring  to  some  degree  throughout  industry, 
but  particularly  in  certain  lines.  But  this  subjective  cause 
in  men  is  given  full  opportunity  for  action  only  when  certain 
favoring  objective  conditions  are  present.  Most  noteworthy 
of  these  besides  the  credit  system  is  a  dynamic  condition  of 
industry.  The  past  century  has  opened  up  new  fields  for 
investment  on  an  unexampled  scale.  Investment  has  ad- 
vanced both  intensively  and  extensively  in  a  series  of  great 
waves.  New  machinery  and  processes  have  given  undreamed 
of  opportunities  for  enterprise  in  the  older  countries,  and 
the  physical  frontier  of  investment  has  moved  outward  with 
the  march  of  millions  of  immigrants  to  people  the  fertile 
wilderness.  Such  factors  disturb  the  equilibrium  of  prices 
both  in  time  and  space,  give  a  powerful  impulse  toward 
higher  values  in  the  older  lands,  and  stimulate  the  hopes 
of  all  investors.  When  the  balance  between  the  capitaliza- 
tions of  various  industries  and  between  the  rents  of  the 
various  periods  proves  to  be  false,  the  inevitable  readjust- 
ment causes  suffering  and  loss  to  many,  but  particularly  in 
the  inflated  industries.  But,  because  of  the  mutual  relations 
of  men  in  business,  few  even  of  those  who  have  kept  freest 
from  speculation  can  quite  escape  the  evils. 

4.  Crises  must  be  discussed  in  connection  with  other  sub- 
jects than  profits.  In  the  text-books  the  subject  of  the 


§lll]  VARIOUS  EXPLANATIONS  OF  CRISES  355 

crisis  is  variously  classified.  It  may  well  be  discussed  with 
money,  credit,  and  banking.  It  has  its  bearings  on  wages, 
justice  in  distribution,  the  theory  of  interest,  and  the  con- 
sumption of  wealth.  But  the  reasons  for  taking  it  up  in 
connection  with  the  subject  of  profits  are  strongest.  In  no 
other  connection  is  the  presence  of  the  element  of  specula- 
tion and  of  chance  profit  and  loss  in  business  so  forcibly 
seen. 

The  income  of  every  class  of  society  is  to  some  extent  Their  prob- 
"affected  by  these  more  or  less  periodic  fluctuations.  They  are 
in  part  the  price  paid  for  progress  under  the  constantly 
shifting  conditions  of  our  dynamic  industry.  In  part  they 
are  the  proof  of  industrial  maladjustment,  The  force  of  the 
shocks  will  no  doubt  be  much  reduced  by  better  banking  and 
business  methods,  and  by  a  sound  currency  system.  More 
important  still,  the  development  of  moderation,  conservatism, 
and  a  less  speculative  spirit  among  the  leaders  of  business 
will  do  much  toward  softening  the  asperity  of  these  scourges 
of  industry. 


PART  III 
THE   SOCIAL  ASPECTS  OF  VALUE 


PART   III 

DIVISION   A— RELATION   OF    PRIVATE    INCOME 
TO   SOCIAL  WELFARE 

CHAPTER  38 
PRIVATE    PROPERTY   AND    INHERITANCE 

§  I.      IMPERSONAL  AND  PERSONAL  SHARES  OF  INCOME 

1.  Under  the  title  "the  social  aspects  of  value"  are  to  be  Functional 
considered  the  influences  exerted  upon  incomes  by  various  so-  ^^J 
cial  acts,  ideals,  and  institutions.  The  incomes  from  the  wages 
of  free  labor  and  those  from  the  rent  of  wealth,  as  studied 
in  the  abstract  theory  of  value,  are  alike  in  their  imper- 
sonal aspect,  their  relation  to  utility.  But  while  wage  flows 
from  a  personal  source— is  an  income  appearing  to  reward  the 
personal  effort  of  the  laborer,  the  income  of  the  wealth-owner 
is  due  to  the  uses  of  goods.  In  the  abstract  theory  of  value 
we  do  not  seek  to  get  behind  this  impersonal  phase  of  rent. 
The  income  arising  from  goods  goes  to  the  de  facto  owner  of 
the  goods.  We  do  not  ask  how  the  goods  first  came  into 
his  possession,  whether  through  labor  or  as  a  gift,  whether 
stolen  or  inherited.  Indeed,  the  economic  theory  of  competi- 
tive rent  may  be  said  not  to  recognize  the  personal  fact  of 
ownership ;  it  is  concerned  with  the  impersonal  fact  of  usu- 
fruct. The  theory  of  economic  rent,  of  time-value  and  cap- 
ital, and  of  wages,  as  measured  by  efficiency,  is  impersonal,  is 
a  study  of  functional  distribution.  In  the  problem  of  monop- 

359 


360  PRIVATE  PROPERTY   AND   INHERITANCE  [CH.  38 

oly  the  personal  factor  is  'more  prominent,  but  the  economic 
study  of  rent  cannot  well  stop  there. 

social  insti-       An  answer,  at  least  in  broad  outline,  must  now  be  given 
tUrsonaiand    *°  ^e  (luesti°n  wny  some  men  are  permitted  to  hold  wealth 
incomes        as  their  "own,"  that  is,  as  "property,"  while  other' men 
are  propertyless.    Why  do  the  owners  exact  payment  for  the 
use  of  goods,  and  why  are  they  allowed  by  their  fellows  to 
do  so?     Back  of  these   facts  is  a  great  system  of  social 
institutions  that  helps  to  determine  what  men  will  do.    Mar- 
ket value  is  a  social  fact ;  price  is  determined  by  the  bidding 
of  men  under  the  existing  social  and  political  conditions. 
These  broader  social  aspects  of  value  remain  for  considera- 
tion. The  influence  of  lawmaking,  of  collective  action,  and  of 
social  institutions  on  value  must  be  noted.    Incidentally,  this 
•  .has  been  done  in  speaking  of  patents,  political  monopolies, 

and  related  questions;  but  mainly  the  subject  has  been 
viewed  from  the  individual  standpoint;  now  it  must  be 
looked  at  more  fully  from  the  social  sicLe. 

Harmony  oi  2.  The  study  of  personal  distribution  should  include  a 
o!nmtUfeS  further  explanation  of  the  various  elements  that  unite  to 
sonai  and  of  form  the  individual 's  income.  l '  Distribution ' '  in  economics 
Ps  *^e  reasone(^  explanation  of  the  way  in  which  the  total 
//product  of  a  society  is  divided  among  its  members.  It  is 
/la  logical  question  and  not  an  ethical  one.  The  economist 
%*' first  asks,  What  is  the  effect  of  utility  on  value?  and,  next, 
What  is  the  relation  of  these  goods  to  the  personal  incomes 
of  the  members  of  society  ?  It  is  not  his  peculiar  part  to  say 
whether  this  is  the  best  distribution  in  an  ethical  sense,  yet 
\  in  pursuing  the  question  of  distribution  one  comes  to  the 
\J5order  of  certain  moral  questions. 

/  The  impersonal  and  the  personal  views  of  distribution  are 
not,  however,  contradictory ;  they  are  different  aspects  of  the 
same  question.  It  cannot  be  said  that  the  analysis  of  eco- 
nomic rent  is  a  purely  abstract  piece  of  work.  In  fact,  the 
impersonal  view  of  distribution  is  essential  to  an  under- 
standing of  the  personal  view  of  it.  The  one  gives  general 


vl]     IMPERSONAL   AND   PERSONAL   SHARES  OF  INCOME   361 

principles,   the  other  the  special   cases.     In  the  practicak 
economic  issues  of  the  day,  the  most  urgent  need  is  a  better  \ 
popular  understanding  of  the  abstracter  theory  of  value./ 
It  is  a  guiding  thread  through  otherwise  bewildering  mazes/ 

The  actual  incomes  of  individuals  are  made  up  of  different  composition 
elements.  The  wage-earner  and  the  salaried  man  are  rarely 
quite  without  material  wealth.  The  enterpriser  gets  some 
income  also  in  the  form  of  contract  interest,  or  as  rent  from 
machinery.  Actual  personal  incomes  are  therefore  a  sum  of 
various  functional  or  impersonal  incomes.  The  earnings  of 
every  agent  may  be  thought  of  as  always  going  either  to 
some  individual  or  to  some  group.  By  social  convention  the 
receiver  of  incomes  that  are  not  personal  gifts  is  supposed 
to  have  produced  them.  This  involves  the  great  assumption 
that  the  owner  of  a  piece  of  land  has  produced  or  contributed 
in  some  way  to  -society  an  amount  equal  to  the  rent.  This 
may  be  true  in  many  cases,  but  in  many  cases  this  view 
canngt  be  accepted  without  close  scrutiny. 

3.  Property  and  wealth  are  respectively  the  personal  and 
the  impersonal,  the  legal  and  the  economic,  aspects  of  pro- 
ductive  agents.  Law  holds  an  important  place  in  the  dis- 
cussion of  actual  economic  questions.  This  fact  was  not 
overlooked  by  John  Stuart  Mill,  and  it  has  been  far  more 
clearly  recognized'  in  the  last  few  years,  especially  by  the 
German  economists.  Political  law  in  the  broadest  sense,  as 
embodied  in  the  state,  is,  in  the  first  place,  a  set  of  rules  to 
guide  the  conduct  and  regulate  the  relations  of  men  in 
society — a  legal  code ;  it  is,  in  the  next  place,  a  governmental 
machine  to  determine  disputes  between  men — a  judicial 
system ;  and  it  is,  finally,  physical  power  to  bring  contestants 
into  court  and  to  secure  and  protect  their  rights— a  police 
force.  Whether  acting  through  legislature,  courts,  or  police, 
in  all  its  dealings  with  wealth  the  law  is  predominantly 
personal.  The  question  the  law  asks  and  answers  regarding 
wealth  is  not  What,  but  Who?  Who  is  the  owner,  who 
should  control,  receive,  enjoy  the  income  ?  Economic  wealth 


362  PRIVATE  PROPERTY  AND  INHERITANCE  [CH.  38 

consists  of  scarce  things,  of  valuable  agents,  and  because  they 
are  scarce,  men  quarrel  over  them.  Because  of  the  imper- 
sonal economic  fact  that  a  field  and  a  machine  produce  scarce 
goods,  arises  the  legal  question  as  to  which  man  is  entitled 
to  enjoy  them. 

In  the  case  of  material  things,  property  value  and  capital 
value  must  be  exactly  equal.  Property  rights  cover  the 
ownership  of  a  material  thing.  Material  property  consists 
of  things  viewed  with  reference  to  ownership;  capital 
consists  of  the  same  things  viewed  with  reference  to 
their  econonnc_services.  There  are  other  property  rights 
besides  those  in  material  things,  various  immaterial  rights 
controlling  the  action  of  the  individual  and  thus  giving  a 
sort  of  ownership  of  the  individual's  actions.  Such  are 
patents  which  forbid  other  men  making  a  particular  kind 
of  machine;  copyrights  which  forbid  other  men  printing 
certain  writings ;  legal  contracts  that  limit  the  action  of  men 
in  various  ways,  and  thus  appear  to  abridge  their  liberty. 

§  II.      THE  ORIGIN  OF  PRIVATE  PROPERTY 

1.  Property  is  ownership,  the  legal  control  over  the 
sources  of  economic  income.  The  Latin  word  property  means 
ownership,  and  hence  that  which  pertains  to  the  individual, 
that  which  is  a  man 's  own.  The  control  of  property  is  greater 
or  less.  The  law  makes  between  property  rights  and  equity 
rights  certain  subtle  distinctions  which  have  their  reason 
in  the  history,  if  not  in  the  logic,  of  the  law,  but  which  are 
not  essential  to  economic  discussion.  What  we  are  interested 
in  are  the  equitable  claims  of  men  to  wealth  rather  than  the 
technical  property  rights.  With  that  thought  let  us  consider 
the  value  of  the  control  of  wealth.  If  a  farm  worth  ten 
thousand  dollars  is  mortgaged  for  five  thousand  dollars,  its 
economic  worth  is  ten  thousand  dollars  after  as  before  the 
mortgage,  but  the  equitable  claim  is  divided  into  two  shares 
of  five  thousand  dollars  each.  The  value  of  the  property 


fcll]  THE   ORIGIN  OF   PRIVATE   PROPERTY  363 

right  cannot,  in  a  reasonable  view,  be  greater  than  the  value 
of  the  economic  wealth  it  covers.  There  is  much  confusion 
in  the  law  of  taxation  on  this  point.  The  law  treats  the 
farm  as  property  and  the  debt  upon  it,  whether  secured  by 
a  mortgage  or  not,  as  another  body  of  property.  Needless 
to  say,  this  leads  to  absurd  conclusions  in  reasoning,  and  to 
gross  injustice. 

There  are  different  forms  of  ownership :  first,  private,  as  Forms  and 
that  of  individuals,  families,  partnerships,  or  corporations; 
second,  public  or  state,  as  the  ownership  of  the  state  house, 
the  highway,  the  Adirondack  forest-reserve  or  the  Erie 
Canal.  These  are  equally  effective  as  against  the  claims  of 
outsiders,  but  the  rights  of  those  inside  the  circle  of  owner- 
ship differ.  For  example,  the  rights  of  one  shareholder 
against  another,  or  the  rights  of  one  member  of  a  family 
as  against  another,  are  not  the  same  as  the  rights  against 
outsiders.  Private  property  is  the  characteristic  feature  of 
our  present  industrial  society,  but  it  exists  side  by  side  with 
state  property  and  with  many  intermediate  grades  between 
private  and  common  property.  Private  property,  while  at- 
tacked on  some  sides,  is  usually  accepted  without  question; 
but  in  this  age  of  inquiry  its  origin  should  be  examined,  its 
limits  and  the  reasons  for  them  should  be  noted,  and  its 
purpose,  faults,  and  effects  should  be  set  clearly  before  the 
judgment, 

2.     The  older  theories  of  the  origin  of  private  property  various 
are  those  of  occupation,  conquest,  labor,  natural  rights,  and  tjj°^.?f 
law.     The  theory  of  occupation  is  that  property  is  based  occupation 
upon  the  priority  of  claim  of  one  who  finds  wealth  without 
an  owner  and  appropriates  it.     This,  to  be  sure,  is  a  state- 
ment of  what  happens  in  the  settlement  of  new  countries,  but 
it  is  not  an  explanation  of  the  property  rights  that  are 
arising  every  moment,  nor  does  it  give  a  logical  reason  for 
the  continuance  of  ancient  property  rights. 

The  same  can  be  said  of  the  conquest  theory,  the  theory  Conquest 
that  property  is  based  on  force.    It  applies  to  the  invasion  of 


364 


PRIVATE  PROPERTY  AND  INHERITANCE 


[CH.  38 


Labor 


Natural 
rights 


Law 


Property  in 

early 

societies 


the  Roman  provinces  by  the  barbarian  tribes  who  divided 
the  country  and  enslaved  the  population.  But  it  rarely  ap- 
plies to  present-day  happenings  and  at  its  best  it  cannot,  to 
modern  minds,  "justify"  present  property  rights. 

The  labor  theory,  meeting  some  queries  where  others  fail, 
is  that  ownership  is  based  on  production,  on  the  right  of 
a  man  to  that  to  which  his  brain  and  his  muscle  have  im- 
parted value.  It  is  evident  that  this  test  leaves  without 
explanation  or  justification  a  great  number  of  things  that 
do  exist  and  have  existed  as  property. 

The  natural-rights  theory  is  that  property  is  necessary 
for  the  realization  of  the  dignity  of  human  nature.  This,  if 
true,  would  be  not  so  much  an  explanation  as  a  condemna- 
tion of  private  property  as  it  has  existed  in  most  cases,  as 
millions  of  men  are  in  every  land  all  but  lacking  in  property, 
and  inequality  of  possession  is  everywhere  marked.  This 
theory  expresses,  however,  one  of  the  worthy  ideals  of  mod- 
ern democracy.  Although,  in  common  with  the  various  other 
"natural  rights"  theories,  it  must  to-day  be  deemed  too 
absolute  and  too  individualistic,  it  contains  a  far-reaching 
truth,  of  which  due  account  must  be  taken  in  our  social 
philosophy.  • 

The  legal  theory  is  that  property  exists  because  the  law 
says  it  shall.  This  expresses  a  truth,  but  is  no  more  than  a 
truism.  The  law  determines  the  limits  of  property,  but 
what  determines  the  limits  of  the  law?  What  practical  or 
social  justification  is  there  for  passing  and  continuing  such 
law?  The  legal  theory  does  not  explain  anything  finally. 
Each  of  these  theories  has  its  defects,  but  each  points  to  some 
fact  important  and  significant,  at  certain  times  and  places, 
in  the  explanation  of  this  widespread  institution. 

3.  The  institution  of  private  property  has  evolved  under 
diverse  conditions;  the  question  of  its  origin  is  not  the  same 
as  that  ofats  present  justification.  In  early  societies  individ- 
ual property  rights  were  not  very  clearly  marked.  Every 
tribe  asserted  against  other  tribes,  and  tried  to  uphold,  by 


§11]  THE  ORIGIN  OF    PRIVATE   PROPERTY  365 

war,  its  claims  upon  its  customary  hunting-grounds ;  but  the 
claims  of  the  individual  hunter  and  fisher  within  the  tribe 
did  not  often  come  into  conflict.  Private  property  at  the 
outset  was  in  personal  possessions,  ornaments,  weapons,  uten- 
sils, which  were  very  meager  in  that  primitive  society  where 
it  was  the  custom  "to  go  calling  with  a  club  instead  of  a 
card-case."  Only  later  came  individual  property  in  land. 
A  few  years  ago  it  was  generally  believed  that  the  organi- 
zation of  the  old  German  tribes  was  politically  an  almost 
perfect  democracy,  and  economically  a  communism  wherein 
all  had  equal  claims  on  the  land.  To-day  this  opinion  is 
very  seriously  questioned.  It  seems  probable  that  the  so- 
called  communism  was  really  an  oligarchy  of  the  favored, 
and  that  the  masses  lived  in  subjection,  cut  off  from  all  but 
a  meager  share  in  the  public  property. 

However  that  may  have  been,  strong  forces  wjthin  historic  origin  vs. 
times  have  put  an  end  to  the  common  ownership  and  tillage  ^tiflcatio 
of  land  as  it  existed  among  the  serfs  of  Europe.  The  common  of  property 
tillage  of  land  was  shown  by  experience  to  be  wasteful.  Not 
only  did  competition  tend  to  bring  the  economic  agents  into 
more  efficient  hands,  but  the  movement  was  furthered  by 
many  acts  of  injustice  and  violence  on  the  part  of  those  in 
power.  Inquiries  into  the  origin  and  development  of  this 
social  institution  are  interesting  and  helpful  in  forming  an 
estimate  of  its  present  significance,  but  the  problems  of  the 
past  are  not  those  of  to-day.  Whether  or  not  the  ancient 
beginning  of  property  in  Europe  was  in  violence  and  evil 
has  but  a  remote  bearing  on  the  question  as  to  the  present 
working  of  it.  Social  conditions  and  needs  have  not  changed 
more  than  have  the  forms  and  limits  of  property  itself.  Each 
generation  has  its  own  problems  to  solve,  and  each  must 
test  existing  institutions  by  their  present  results,  ignoring 
for  the  most  part  the  evils  of  the  past. 

4.  Private  property  may  now  be  justified  mainly  on  the 
grounds  of  social  expediency.  Th^  is  a  broad  explanation 
under  which  can  be  brought  the  many  varying  conditions; 


366  PRIVATE   PROPERTY  AND  INHERITANCE  [CH.  38 

social  brft  it  has  the  fault  of  a  broad  explanation,  that  it  needs 

the^und^0  ^e  ^urther  explained.   |  Conceding  that  private  property 
of  private      works  hardship  to  the  individual  in  many  cases,  it  must  be 
justified  on  the  ground  that,  on  the  whole,  it  furthers  the 
progress  of  society/?  Private  property  is  looked  upon  by  some 
as  merely  reflecting  or  expressing  the  economic  inequalities 
ofjnen ;  the  man  poor  in  ability  is  the  man  poor  in  property. 
It  is  looked  upon  by  others  as  exaggerating,  indeed  at  times 
reversing,  the  economic  abilities  of  men.    In  general,  it  must 
be  judged  by  this  test :  Does  it  further  the  welfare  of  society 
better  than  would  any  alternative  plan  for  the  control  of 
I  economic  wealth  ?    The  question  is  not  whether  it  is  faultless, 
4or  no  human  institution  is  so.    Nor  must  it  be  assumed  that 
shitting        property  is  a  fixed  and  uniform  mode  of  control;  there  are 
touts  of  1  »  manv  kinds  of  property.    Different  parts  of  wealth  may  be 
property        treated  in  different  ways:  there  may  be  private  property 
in  wagons,  and  public  property  in  roads;  private  property 
in  houses,  and  public  property  in  forests ;  private  property  in 
automobiles,  and,  in  some  countries,  public  property  in  rail- 
way-carriages.    But  any  rule  of  property,  like  any  other 
workable  human  law,  must  be  applicable  to  all  individuals 
that  meet  the  conditions.     Hence   any  human   institution 
must  be  judged  by  its  average  working,  not  by  exceptional 
cases. 

The  very  acceptance  of  the  theory  of  social  expediency 
implies  the  need  of  a  readjustment  of  the  institution  of 
private  property ;  for  private  property,  as  it  is  found  to-day, 
is  complicated  by  many  historical  accidents.  Survivals  of 
ancient  injustice  and  relics  of  feudal  institutions  that  rest 
on  no  vital  reason  remain  in  our  new  country  as  well  as  in 
the  older  ones.  The  limits  of  property  in  many  respects  are 
determined,  not  according  to  the  logic  of  expediency,  but  by 
the  social  inertia  which  often  governs  succeeding  generations. 


§111]  LIMITATIONS  OF   PRIVATE   PROPERTY  367 


§  III.       LIMITATIONS  OF  THE  RIGHT  OF  PRIVATE  PROPERTY 

1.  Unmodified  private  control  of  property  is  unknown:  Public 
the  public  makes  many  reservations  in  its  own  interest.    Few  interests 

.  .  limiting 

realize  the  manifold  ways  in  which  property  rights  are  lim-  property 
ited.  There  is,  first,  a  whole  set  of  limitations  to  prevent  rights 
nuisances.  An  owner  in  many  situations  is  not  free  to  build 
a  slaughter-house  or  to  start  a  glue-factory  on  his  land. 
Property  is  governed  by  general  public  utility,  and  anything 
that  threatens  to  become  a  nuisance  or  a  danger  is  excluded. 
When,  under  the  right  of  eminent  domain,  the  state  or  the 
railroad  takes  the  old  homestead  from  its  owner  who  would 
live  and  die  there,  the  payment  of  money  damages  to  him 
does  not  make  this  the  less  a  limitation  of  his  property  rights* 
Rights  of  way  on  property  exist  either  through  contract  or 
by  prescription  permitting  its  public  use.  Most  important 
of  all  limitations  is  the  right  of  taxation,  by  which  society 
takes  more  or  less  of  private  incomes  for  purposes  of  which 
the  individual  owners  may  in  no  way  approve. 

2.  The    law    enforces-  a    multitude    of    private    claims  Private 
against  private  owners.  A  variety  of  rights  called  easements  ^^ 
or  servitudes  may  attach  to  private  property,  modifying  its  property 
exclusive  use.    Leases  for  any  period  are  a  virtual  limitation     g  s 
of  the   control  and  division  of  the  ownership.     Both  the 
holder  of  the  lease  and  the  owner  of  the  property  have 
certain  rights  before  the  law.    The  lender  of  money  secured 

by  mortgage  has  a  legally  recognized  and  enforceable  interest 
in  the  mortgaged  wealth.  Property  is  left  in  trust  for  the 
benefit  of  persons  or  of  institutions  or  of  the  public,  and  is 
administered  by  trustees  who  are  strictly  bound  to  the  execu- 
tion of  the  terms  of  their  instructions.  Contracts  of  many 
sorts  are  entered  into  by  owners,  limiting  their  control  in 
manifold  ways,  and  the  law  enforces  these  contracts.  These 
all  form  a  complex  of  equitable  claims,  which  together  equal 
in  value  one  undivided  property  right,  which  in  turn  equals 


368  PRIVATE  PROPERTY  AND  INHERITANCE  [CH.  M 

the  value  of  the  wealth.  These  claims  mutually  limit  each 
other  (whether  they  be  called  equitable  claims,  or  liens,  or 
property  rights),  and  wealth  is  not  multiplied  by  multiply- 
ing the  claims,  as  the  lawmakers  unfortunately  sometimes  as- 
sume to  be  the  case. 

Limitation         3.     The  right  of  bequest,  or  of  gift  at  death,  is  limited  in 
of  bequest     various  ways  in  different  countries.     The  term  bequest  im- 
plies a  will,  usually  a  written  will  in  which  the  person,  fore- 
seeing death,  has  expressed  his  wishes  as  to  the  disposition 
of  his  property.     It  is  said  sometimes  that  bequest  is   a 
"logical"  result  of  private  property,  but  the  law  does  not 
treat  it  as  such.    In  countries  where  hereditary  aristocracies 
exist,  primogeniture  is  in  some  cases  required  by  law,  in 
others  so  strongly  favored  by  public  opinion  that  it  is  prac- 
tically always  followed.    Custom  limits  bequests  in  England 
to   members  of  the   family,   and  wills   giving  outside  the 
family  are  rare,  and  are  almost  always  broken  in  the  courts. 
John  Stuart  Mill  contrasts  this  with  the  frequent  practice 
by  rich  men  in  America  of  giving  for  public  purposes.    In 
France  the  right  of  bequest  outside  the  family  is  legally 
limited;  only  the  share  of  one  child  can  be  willed  away 
by  the  father,  and  the  rest  must  be  equally  divided  among 
the  children.    Settlements  and  fidei  commissa  are  limited  in 
many  countries,  because  of  the  recognized  social  evils  re- 
sulting   from    the    tying    up    of    estates    for    generations. 
Throughout  the  history  of  England,  Parliament  has  given 
attention  to  the  question  of  mortmain,  which  chiefly  con- 
cerned the  drifting  of  great  estates  into  the  hands  of  the 
church  or  of  corporations,  as  a  result  of  bequests  by  the  pious. 
Only  recently   in   England,   and  to   a  less   extent   in  this 
country,  has  been  seriously  discussed  the  policy  of  permitting 
unlimited  endowments  to  charitable  institutions,  and  new 
legislation  has  diverted  from  their  original  purposes  some 
of  the  old  endowments.     These  varied  and  often  strict  lim- 
itations of  the  right  of  private  property  are  all  determined 
by  some  thought,  wise  or  foolish,  of  social  expediency. 


§lllj  LIMITATIONS  OF  PRIVATE   PROPERTY  369 

4.     The  law  of  inheritance  varies  greatly  with  time  and  Limitation 
place.    Inheritance,  in  contrast  with  bequest,  usually  means  of  right  of 

inheritance 

succession  to  the  property  of  one  who  has  died  intestate, 
that  is,  has  made  no  will.  The  old  idea  of  family  unity 
survives  in  great  measure  in  modern  laws  of  inheritance. 
The  nearest  living  relatives,  no  matter  how  distant  they  may 
be,  inherit  property  when  there  is  no  will.  When  a  miser 
dies  in  solitude  and  neglect,  the  world  must  be  searched  over 
to  find  a  remote  cousin  to  take  the  hoarded  wealth.  Inheri- 
tance is  limited  largely  at  present  by  the  power  of  taxation. 
The  view  is  growing  that  the  claims  of  the  society  in  which 
wealth  has  been  acquired  are  stronger  than  those  of  relatives 
distant  alike  in  space,  in  blood,  and  in  affectionate  interest. 
This  view  is  reflected  in  many  recent  inheritance-tax 'laws 
which  take  from  the  shares  of  distant  relatives  a  goodly 
portion  for  public  purposes. 

The  question  is  raised  in  many  minds,  If  private  property 
is  not  an  absolute  right,  what  shall  be  its  limits?  What 
changes  should  be  made  in  it  ?  The  essential  thought  in  the 
various  attacks  on  the  institution  of  private  property  is  that, 
because  it  occasions  inequality  in  incomes,  it  is  not  socially 
expedient.  The  conviction  is  growing  that,  in  some  general 
way,  incomes  should  correspond  to,  and  reflect,  social  service. 
It  is  well  to  consider  more  closely  what  the  terms  social 
expediency  and  social  service  imply. 


CHAPTER  39 
INCOME    AND    SOCIAL    SERVICE 

§  I.       INCOME   FROM    PROPERTY 

The  justice  1.  Property  rights  must  meet  the  test  of  social  expedi- 
°uestioned  ency-  ^  private  property  is  defended  on  the  ground  of 
social  expediency,  it  must  show  good  social  results.  It  is  not 
a  sacred  thing ;  it  is  open  to  examination,  and  must  be  judged 
by  its  fruits.  Of  all  the  forms  of  income,  that  from  property 
has  been  most  strongly  attacked.  The  thought  is  that  enjoy- 
ment of  wealth  should  not  be  found  apart  from  labor,  and 
that  it  should  bear  some  proportion  to  services  performed. 
The  enjoyment  of  an  ample  income  by  one  who  does  no  more 
than  to  draw  checks  or  to  sign  coupons  seems  to  many 
minds  to  be  unjust ;  and  it  is  often  questioned  whether  there 
is  any  social  service  performed  by  the  receivers  of  the  rent 
from  land.  Property  seems  in  many  cases  to  be  distributed 
without  rule  or  reason.  It  does  not  correspond  with  beauty, 
strength,  wit,  wisdom,  temperance,  gentleness,  or  charity. 
Since  the  beginning  of  the  Christian  era,  reformers  have 
assailed  and  preached  against  the  prevailing  inequality  of 
wealth,  f  The^idea  that  incomes,  if  not  equali_sh.ould-corre- 
spond  to  social  service  lias  always  been  present  in  some 
vague  way  in  the  minds  of  men.) 

2.  The  right  to  transmit  property  by  inheritance  or  by 
y^fi  may  ^e  Judged  with  reference  to  its  effect  on  the  giver, 
on  the  receiver,  and  on  society  at  large.  It  is  well  to  take 
these  three  points  of  view.  The  right  to  dispose  of  property 
either  during  life  or  at  death  has  undoubtedly  in  many 

370 


$1]  INCOME   FROM  PROPERTY  371 

ways  a  good  effect  on  the  character  of  men.  It  stimulates 
the  father  to  provide  for  his  children,  the  husband  to  provide 
for  his  wife.  There  is  a  joy  in  giving,  a  joy  in  the  power  to 
bestow  one's  wealth  on  those  one  loves.  The  right  to  give 
stimulates  industry,  frugality,  ingenuity,  and  yields  pro- 
ductive results.  Much  of  the  existing  wealth  probably  never 
would  have  been  created  if  men  did  not  have  this  right  of 
gift.  But  there  is  a  limit  to  the  working  of  this  motive,  and 
other  motives  often  are  much  more  effective.  Many  men 
after  gaining  a  competence  continue  to  work  for  love  of 
wealth  and  power  in  their  own  lifetime,  as  the  miser  contin- 
ues to  toil  for  love  of  gold.  When  men  without  families  die 
wealthy,  when  men  that  have  not  the  slightest  interest  in 
their  nearest  relatives  labor  and  amass  wealth  till  their 
dying  day,  it  is  evident  that  the  right  to  bequeath  property 
has  little  to  do  with  their  efforts.  Love  of  accumulation 
and  love  of  power  in  these  cases  supply  the  motive.  A  more 
limited  liberty  to  dispose  of  property  at  death  might  still 
suffice,  therefore,  to  call  out  the  greater  part  of  the  efforts 
now  made  to  accumulate  property. 

That  the  effects  on  the  receiver  of  the  property  are  good  Effect  of 
is  somewhat  more  doubtful.  It  is  true  that  children  raised  in  ^e|^ht 
great  comfort  or  luxury  would  be  more  than  ordinarily  un- 
happy if  plunged  into  poverty  or  even  into  humble  cir- 
cumstances on  the  death  of  their  parents.  There  is  much 
social  justification  for  permitting  families  to  maintain  an 
accustomed  standard  of  comfort.  Few  would  deny  that  a 
moderate  provision  by  parents  to  provide  education  and  op- 
portunity for  their  children  is  commendable  and  desirable. 
But  the  (evil  effects  of  waiting  for  dead  men's  shoes) are 
proverbial.  Many  a  boy's  greatest  curse  has  been  his  father's 
fortune.  Men  of  native  ability  wait  idly  for  fortune  to 
come,  and  opportunities  for  self-help  slip  by  unheeded.  The 
world  often  exclaims  over  the  failure  of  the  sons  of  noted 
men  to  achieve  great  things,  for,  despite  confusing  evidence, 
men  still  have  faith  in  heredity.  A  too  easy  fortune  saps 


372  INCOME  AND   SOCIAL  SERVICE  [CH.  39 

ambition  and  relaxes  energy;  and  thus  rich  men's  sons,  if 
not  most  carefully  and  wisely  trained,  are  made  pitiable 
paupers  in  spirit,  while  the  self-made  fathers  think  their 
boys  have  chances  they  themselves  did  not  enjoy.  The 
greater  social  loss  is  not  the  dissipated  fortunes,  but  the 
ruined  characters. 

The  effects  of  inheritance  on  the  community  are  good  in 
so  far  as  it  secures  efficient  management  of  wealth.  If  the 
son  or  relative  has  been  in  business  with  the  deceased,  there 
is  a  reason  that  he  should  inherit  the  property,  and  his 
succession  to  it  makes  the  least  disturbance  to  existing  busi- 
ness conditions.  But  every  profligate  son  is  an  argument 
against  inheritance ;  every  incompetent  heir  is  an  argument 
in  the  hands  of  the  enemies  of  the  existing  order  of  society. 
It  is  to  society's  interest  that  no  able-bodied  member  shall 
stand  idle.  Every  child  should  have  presented  to  him  the 
motive  to  devote  his  powers  to  the  social  welfare  in  economic 
or  other  directions.  Moreover,  many  feel  that  the  great  for- 
tunes now  accumulating  through  successive  generations  in 
the  hands  of  a  few  families  are  endangering  our  free  society, 
even  if  these  fortunes  should  continue  to  be  well  adminis- 
tered. There  is  a  widespread  feeling  that  the  heredity  of 
great  wealth  is,  like  the  heredity  of  political  power,  out  of 
harmony  with  the  democratic  spirit— though  this  may  easily 
become  a  misleading  comparison.  Still,  democracy  wishes 
to  see  men  as  individuals  put  to  the  test,  not  profiting  forever 
by  the  deeds  of  their  forebears.  This  feeling  is  shared  by 
those  who  cannot  be  charged  with  radical  prejudices.  A 
few  years  ago  the  Illinois  Bar  Association  passed  a  somewhat 
startling  resolution  favoring  moderate  limits  to  inherited  for- 
tunes. Every  year  sees  bills  of  this  purport  introduced  in 
the  legislatures  and  in  Congress.  Andrew  Carnegie  says  it 
'would  be  a  good  thing  if  every  boy  had  to  start  in  poverty 
and  make  his  own  way.  Cecil  Rhodes  recorded  in  his  will 
his  contempt  for  the  idle,  expectant  heir. 

3.     Social   expediency  will   limit   the   right   of  intestate 


§1]  INCOME   FROM   PROPERTY  373 

inheritance  to  persons  in  essential  economic  and  social  rela-  The  test  of 
tions.  Public  opinion  is  not  yet  crystallized  in  favor  of  this  ^nceTaws 
formal  proposition,  but  tends  strongly  toward  it.  The  fore- 
going considerations  show  that  the  right  of  gift  in  the  life- 
time of  the  giver  should  be  the  freest.  The  right  of  bequest, 
that  is,  of  gift  by  will,  should  be  liberal.  The  man  who  has 
acquired  wealth  may  well  be  trusted  to  decide  who  bear  to 
him  a  close  social  or  personal  relation,  and  to  say  whose 
lives  have  in  a  measure  furnished  the  motives  of  his  activity. 
But  the  right  of  intestate  inheritance  by  distant  relatives  is 
one  that  stands  on  weak  social  foundations  to-day.  It  ap- 
pears to  be  an  unreasonable  survival  from  more  patriarchal 
conditions.  The  true  test  is  whether  the  wish  to  provide  for 
these  heirs  has  furnished  the  motive  for  the  producing  and 
preserving  of  the  wealth.  The  claims  of  those  nearest  in 
blood  and  closest  in  personal  relations  are  strongest.  Fam- 
ily affection  and  friendship  form  the  strongest  of  social  ties, 
and  it  is  socially  expedient  to  cultivate  them.  Motives  for 
abstinence  and  industry  must  be  strengthened.  But  the  same 
test  shows  that  the  zealous  regard  of  the  American  law  for 
the  rights  of  grandnephews  in  Australia,  or  even  of  brothers 
long  absent  in  distant  quarters  of  this  country,  is  irrational, 
and  is  unjust  to  the  community  where  the  fortune  lies. 

4.     Many  fortunes  built  on  favoring  legislation  are  de-  social 
fended  as  due  to  social  service.     In  the  Middle  Ages  kings  ^^ored 
often  granted  great  estates  to  nobles  as  rewards  for  past  merit  classes 
and  as  a  payment  for  expected  public  actions.     The  great 
landlords  were  the  magistrates,  military  leaders,  and  support- 
ers of  social  order,  and  thus,  in  the  judgment  both  of  the  king 
and  of  the  commonalty,  the  nobles  earned  their  incomes  by 
their  social  service.     While  this  practice  has  disappeared 
under  constitutional  government,  large  grants  are  still  made 
to  royal  families.    Many  Englishmen  who  are  democratic  at 
heart  uphold  such  grants  as  the  price  of  social  stability.    Re- 
gard for  royalty  is  so  deep-rooted  in  the  minds  of  the  people 
of    any    long-established    monarchy    that    there    is    always 


374 


INCOME  AND   SOCIAL   SERVICE 


[CH.  39 


danger  in  change.  England  must  pay  many  millions  annu- 
ally as  the  price  of  loyal  and  conservative  sentiment.  So 
long  as  this  is  true,  a  family  of  royal  figureheads  and  idlers 
performs  a  social  service. 

Protective  tariffs  sought  by  wealthy  manufacturers  are 
granted,  not  ostensibly  to  help  them,  but  to  help  the  country. 
The  argument  is  that  the  benefits  are  diffused.  Aid  to  enter- 
prises in  private  hands,  such  as  ship  subsidies  or  as  the 
grants  to  the  Pacific  railroads,  are  defended  on  the  ground 
that,  as  a  whole,  society  benefits  by  thus  increasing  the  in- 
come of  one  class.  The  promise  of  social  service  is  most 
urged  by  those  who  get  the  immediate  benefit.  Their  eyes 
are  keenest.  The  manufacturer  sees  clearly  the  benefits  that 
will  come  to  his  factory  from  a  protective  tariff,  but  before 
he  can  get  it  he  must  convince  many  others  that  they  too 
will  gain.  The  majority  of  the  American  electorate  is  not 
voting  a  special  favor  at  the  polls,  but  is  recognizing  what  it 
believes  to  be  in  its  own  interest.  Most  students  of  social 
questions  doubt  the  wisdom  of  most  of  these  grants  to  the 
wealthy  on  grounds  of  social  service.  The  burden  of  proof 
is  on  their  advocates,  but  few  to-day  are  so  rash  as  to  say  that 
such  a  claim  of  social  service  is  never  sound. 

5.  Property  in  natural  agents  is  the  most  strongly  at- 
tacked. In  the  case  of  great  natural  deposits,  such  as  those 
of  coal  or  iron,  the  social  service  that  is  performed  by  the 
mine-owner  is  hard  to  see.  Great  incomes  are  drawn  in  the 
form  of  royalty  or  rent  by  those  who  never  lift  a  pick 
or  direct  a  stroke  of  work.  Agricultural  land  in  the  hands 
of  absentee  landlords  yields  an  income  not  very  clearly  due 
to  social  service,  and  this  phase  of  property  has  been  espe- 
cially assailed  during  the  past  century.  The  modern  form 
of  this  discussion  is  concerning  ''the  unearned  increment,'* 
the  rise  in  the  value  of  lands  as  a  result  of  social  growth. 
It  is  proposed  to  appropriate  by  "the  single  tax"  the  entire 
rental  value  of  the  land  for  the  use  of  the  public. 

The  defense  of  property  in  land  is  first  positive:  taking 


§1]  INCOME  FROM  PROPERTY  375 

TTotJjie  extreme  but,  thp  usual  case,  private  property  secures 
the  discovery  and  development  of  natural  resources  and 
their  thorough  use  and  good  management  (not  necessarily 
by  personal  labor  with  the  hands).  If  this  is  true,  it  is  well 
for  the  individual  and  for  the  community  to  have  this 
wealth  in  private  hands.  But  in  other  cases  there  is  merely 
a  negative  argument  for  property  in  land:/no  other  better 
method  of  employing  it,  has  been  devised  and  found  prac- 
JicabljL,  The  experience  with  state  ownership  of  mines,  for- 
ests, and  estates  has  not  definitely  answered  in  every  case  the 
question  whether  the  social  results  of  state  ownership  are 
more  favorable  than  those  of  private  ownership.  In  some 
cases  they  clearly  are  not,  in  others  they  may  be ;  and  as  the 
balance  of  opinion  inclines  in  the  direction  of  public  owner-  <— 
ship,  other  reforms  will  doubtless  be  undertaken. 

6.  The  present  inequality  of  wealth,  not  private  property  inequality 
as  such,  is  often  attacked.  It  is  estimated  that  in  the  United  of  fortunes 
Kingdom  two  per  cent,  of  the  families  own  seventy-five  per 
cent,  of  all  the  wealth,  while  ninety-three  per  cent,  own  less 
than  eight  per  cent.  In  the  United  States  it  is  estimated  that 
one  per  cent,  of  all  the  families  own  more  than  the  remaining 
ninety-nine  per  cent. ;  and  at  the  other  part  of  the  scale 
eighty-seven  per  cent,  of  all  the  families  own  less  than 
twelve  per  cent,  of  all  the  wealth.  The  trend  has  been  toward 
concentration  of  fortunes  and  a  larger  proportion  of  the 
growing  income  from  property  is  in  a  few  hands.  Many 
feel  that  the  law  of  property  is  defective  when  this  is  pos- 
sible, although  at  the  same  time  the  average  income  of  the 
wage-earner  is  increasing.  Yet,  it  is  not  the  institution  as 
a  whole  that  is  attacked,  but  its  details.  The  custom  of  equal 
division  of  property  among  children  in  the  United  States 
has  not  been  as  effective  in  keeping  fortunes  small  as  was 
expected.  The  wealthy  American  families  have  averaged 
small,  and  in  some  of  the  most  prominent  the  rule  of  equal 
division  has  not  been  followed.  Opportunities  for  the  in- 
vestment of  small  savings  at  low  interest  are  not  lacking,  but 


376  INCOME  AND  SOCIAL  SERVICE  [CH.  39 

the  great  fortunes  overtower  the  little  ones,  securing-  the 
great  profits  and  great  political  and  economic  power.     The 
farms  and  the  villages  are  refuges  for  the  small  industry 
and  for  the  small  fortunes,  and  this  fact  has  a  great  influence 
on  our  national  character.     The  whole  social  atmosphere  in 
ie  cities,  with  their  extremes  of  wealth,  differs  from  that  in 
le  country,  and  this  contrast  promises  to  become  greater 
3  the  years  go  on. 

j        7.     The  ideal  of  property  rights  is  that  they  shall  furnish 
'     ^e  highest  motives  for  efficient  social  service.    Private  prop- 
erty furnishes  such  a  motive  in  a  broad  way,  but  its  most 
ardent  defenders  will  recognize  that  it  does  so  imperfectly. 
It  is  an  institution  that  has  been  tried  and  that  does  the 
work,  while  other  methods  suggested  to  do  away  with  it  are 
found  to  be  dreams.    The  ideal  of  socialism  is  the  abolition 
of  private  property,  the  centralizing  under  the  control  of  the 
fii       state  of  all  wealth,  except  the  simple  personal  belongings, 
i  y  /  clothing  and  other  consumption  goods.  |  BjgJt-  history  and 
^7human  nature  unite  to  testify  that  extreme  socialism  is  an 
unworkable    plan,    excepting   under   special    conditions,    as 
in  barbarous  times  and  under  a  political  despotism.     The 
modern  ideal  for  the  control  of  wealth  is  the  best  attainable 
harmony  of  liberty  and  efficiency.  I/If  private  property  as 
it  is,  falls  short  of  that  ideal,  at  any  rate  it  works  either  on 


1 


small  or  on  a  large  scale,  and  socialism  does  not  work  at  all. 
Property  rights  as  they  exist  are  not  a  product  of  pur? 
reason.  They  are  the  result  of  social  evolution,  of  historical 
accidents,  of  class  legislation,  and  of  selfish  interest  in  many 
cases.  Changing  social  conditions  and  ideas  are  bringing 
many  changes  in  law,  and  further  change  must  be  expected 
to  come. 

§  II.      INCOME    FROM    PERSONAL    SERVICES 

/    1.     Incomes  from  legitimate   enterprise  and  speculation 
Correspond  roughly  to  social  service.    It  has  been  recognized 


§11] 


INCOME  FROM  PERSONAL  SERVICES 


377 


above  that  there  are  many  grades  of  chance,  of  speculation, 
and  of  enterprise.  The  extreme  cases  are  bald  crimes  and  are 
punished  as  such.  Over  some  men  that  never  directly  break 
the  law  there  always  hangs  a  suspicion  of  guilt.  It  is  the 
purpose  of  the  law  to  make  dishonesty  unprofitable,  but  how 
imperfectly  it  does  so!  There  are  many  cases  of  chance 
gains  where  the  lucky  man  without  social  service  legally  en- 
joys his  fortune.  The  law  must  be  framed  in  broad  terms,  and 
cannot  provide  for  every  case.  It  may  broadly  forbid 
lotteries  whose  evils  clearly  exceed  their  benefits.  But  what 
would  be  the  effect  of  taking  away  reward  for  the  discovery 
of  a  gold-mine,  even  though  sometimes  it  is  awkward  stum- 
bling, not  industry,  that  reveals  the  veins  of  metal  1  Society 
has  studied  that  question  in  the  past;  even  now  changes  are 
being  made  in  the  laws;  and  in  their  turn  the  citizens  and 
legislators  of  the  next  generation  must  decide  the  question. 
Itia  always  under  consideration. 

y^Are  the  rewards  of  the  successful  enterpriser  greater  than 
he  deserves  ?  How  shall  it  be  judged  what  he  deserves  ?  The 
answer  is  in  the  form  of  a  question,  Could  society  have  the 
service  without  the  reward?  Society  may  be  thought  of  as 
hiring  the  services  of  the  efficient  business  man  at  the  lowest 
price.  Does  it  wish  the  services  of  Cornelius  Vanderbilt  in 
organizing  a  great  system  of  railroads,  of  Andrew  Carnegie, 
of  Pierpont  Morgan?  What  can  it  get  them  for?  It  must 
appeal  not  only  to  their  love  of  money  but  to  their  love  of 
power.  Large  services  and  large  results  can  be  bought  only 
with  large  rewards.  The  shrewd  enterpriser  is  not  to  be 
paid  with  abstract  social  gratitude.  He  is  not  to  be  tricked, 
as  is  a  Chinese  god,  with  tissue-paper  golcL^^ 

But  in  many  ways  fortunes  appear  to  grow  without  social 
services,  and  sometimes  with  social  harm.  Russell  Sage,  the 
noted  capitalist  (who  should  know  something  of  Wall  Street), 
in  speaking  of  the  greatest  of  American  corporations,  said: 
"  They  dominate  wherever  they  choose  to  go.  They  can 
make  and  unmake  any  property,  no  matter  how  vast.  They 


378 


INCOME   AND   SOCIAL   SERVICE 


[OH.  39 


Antisocial 
use  of  rare 
ability 


7 


can  almost  compel  any  man  to  sell  out  anything,  at  any 
price."  Henry  Clews,  the  well-known  New  York  banker, 
said  of  a  certain  group  of  financiers:  "Their  resources  are 
so  vast  that  they  need  only  to  concentrate  on  any  given 
property  in  order  to  do  with  it  what  they  please. 
There  is  an  utter  absence  of  chance  that  is  terrible  to 
contemplate.  This  combination  controls  Wall  Street  almost 
absolutely.  With  such  power  and  facilities  it  is  easily  con- 
ceivable that  these  men  must  make  enormous  sums  on  either 
side  of  the  market. ' ' 

2.     The  high  pay  of  rare  ability  and  skilled  labor  reflects 
in  general  a  high  social  service.     The  large  income  of  some 
men  reflects  service  to  a  narrow  class,  not  to  society  as  a 
whole.  \Lawyers  as  a  class  aid  in  maintaining  right,  but  a 
corporation  lawyer  may  get  enormous  fees  for  defeating 
just  public  claims ;  a  skilful  criminal  lawyer  may  grow  rich 
aiding  the  guilty  to  escape  justice.     Other  service  ministers 
to  the  whims,  follies,  and  vices  of  the  men  who  pay  the  bill. 
.  Such  a  service  is  "social"  in  a  mean  sense,  corresponding 
to  the  low  standards  of  desire  in  that  social  group.     But 
what  of  the  high  rewards  of  skilled  service  ministering  to 
worthy  ends'?    Such  favorites  of  fortune  as  Jenny  Lind  and 
Patti  have  received  five  thousand  dollars  for  a  single  con- 
cert.   Is  this  because  they  are  the  lucky  possessors  of  a  rare 
gift,  or  because  they  perform  a  social  service  deserving  such 
/reward  ?     Certainly  many  of  their  auditors  get  what  they 
I  want  and  believe  they  are  getting  the  worth  of  their  money. 
General   ^  1   In  general  the  legal  right  of  everyone  to  get  the  highest 
social  result  Ifoay  he  can  jn  a  free  an(j  open  market  is  essential  to  the 

of  reward-     If 

ing  talent  lulling  forth  of  ability.  In  a  particular  instance  it  is  pos- 
Ssible  that  the  service  would  continue  if  one  half  or  more 
of  the  income  were  confiscated  by  the  public;  but  such 
a  personal  discrimination  would  introduce  an 
and  demoralizing  uncertainty  into  the  problem, 
tell  how  far  the  exceptional  money  rewards 


arbitrary 
Who  can 
have 


in- 


spired    to    the    highest    cultivation    of    great    genius    and 


§11]  INCOME   FROM   PERSONAL   SERVICES  379 

of  many  minor  talents?  In  a  broad  but  very  true  sense, 
therefore,  it  appears  that  high  personal  achievement,  large 
economic  reward,  and  large  social  service  are  connected. 

3.  The  low  income  of  unskilled  labor  seems  to  fall  short  social 

of  its  social  service.    This  does  not  refer  to  the  feeble-minded  serviceof 

numtuki 

or  utterly  inefficient,  but  rather  to  honest,  industrious,  workers 
"day-laborers,"  and  to  the  low-paid  manual  workers  in 
field,  on  railroad,  and  in  factory.  Their  service  is  essential 
to  the  existence  of  society  as  it  is,  to  all  the  higher  arts,  to 
the  sciences,  and  to  the  amenities  of  life ;  their  tasks  are  the 
roughest,  most  painful,  most  dangerous ;  yet  their  pecuniary 
rewards  are  the  lowest.  There  is  such  a  unity  in  society  that 
each  more  fortunate  man  is  dependent  on  the  services  of 
the  humbler  laborers  who  make  up  a  large  part  of  society. 
According  to  the  breadth  of  social  sympathy  their  claims 
seem  more  or  less  urgent. 

^There  is  a  vaguely  recognized  and  growing  conviction  Theprob- 
that  these  hewers,  of  wood  and  drawers  of  water  should  ^creasing 
enjoy  a  larger  income.     But  how  are  they  to  get  it?     How  their  reward 
is  society  to  grant  it  to  them?  |They  get  what  they  can  f 
under  the  competitive  conditions,  they  get  what  their  service 
is  worth  in  the  market.^  Are  the  conditions  of  the  competi- 
tion fair?     If  not,  what  will  be  the  effect  of  a  change?     If 
tUey^get_jnore,  others  will  get  less.;7 and  with  what  result? 
However  great  the  wish  for  better  things,  the  attempt  to 
change  conditions  fundamentally  in  a  forcible  and  artificial 
way   is   both   dangerous   and   foolish^   Improvement  must 
come  through  the  cooperation   of  many  indirect   agencies 
gradually  changing  the  nature  and  direction  of  the  deeper 
economic  forces. 

4.  The  services  of  each  are  being  measured  and  paid  for  imperfect 
by  each  and  all.    In  two  ways  society  is  putting  its  valuation  J^^ 
on  the  economic  services  of  other  members  of  society:  first,  estimates  of 
by  law,  or  formal  social  convention ;  secondly,  by  individual   servlce 
estimates.     By  formal  law  is  determined  what  institutions 

shall  be  continued.     If  the  class  of  property  owners  is  con- 


380 


INCOME   AND   SOCIAL   SERVICE 


[CH.  39 


sidered  worthy  of  this  reward,  the  institution  of  property 
will  be  continued;  if  not,  it  will  be  altered  or  destroyed. 
These  decisions  are  made  imperfectly,  but  as  well  as  men  of 
limited  intelligence  and  honesty  can  make  them.  If  men 
were  more  capable  in  both  these  ways  they  would  enact 
better  laws.  Again,  individuals  are  putting  their  estimates 
on  others  in  bidding  for  services  to  minister  to  wisdom  and 
virtue  or  to  ignorance  and  vice.  If  there  is  to  be  a  much 
juster  estimate  of  social  service,  there  must  be  wiser  men 
in  society. 

JJDoes  the  world  owe  each  man  a  living?  No;  on  the  con- 
trary, each  man  owes  the  world  his  services  in  exchange  for 
ais  living.J  The  pauperism  of  spirit  that  consists  in  taking 
somethingror  nothing  is  found  in  every  rank  of  society  that 

enjoys  the  blessings  of  progress  without  giving  its  best 
services  in  return.  The  ideal  of  a  better  adjustment  of  re- 
ward and  service  grows  in  the  minds  of  men.  [Social  evolu- 
tion, shaped  by  this  changing  ideal  and  by  accumulating 

xperience,  will  bring  into  closer  relation  the  social  services 
md  the  economic  rewards  of  nienJ 


CHAPTER  40 

WASTE   AND   LUXURY 

/T 

§  I.       WASTE  OF  WEALTH 

1.  The  accidental  destruction  of  wealth  is  a  loss  to  the  LOSS  of 
owner,  rarely  with  benefit,  on  the  whole,  to  others.  In  the  wealthina» 
consumption  of  wealth  the  loss  of  its  utility  is  accompanied  anexchang- 
by  the  gratifying  of  wants;  in  the  destruction  of  wealth  "^economy 
utility  is  lost  without  the  gratifying  of  wants.  In  a  simple 
society,  without  exchange,  the  result  of  such  a  loss  is  evident. 
If  food  is  destroyed,  men  suffer  from  hunger  or  gratify 
appetite  less  perfectly;  if  clothing  is  destroyed,  they  are 
cold ;  if  houses  are  destroyed,  they  have  no  shelter.  Likewise, 
if  the  self-sufficing  family  on  a  farm  loses  wealth  by  fire  or 
storm  or  blight,  its  economic  environment  is  made  less  fitted 
to  gratify  wants.  In  the  conditions  of  our  society,  where 
goods  are  exchanged,  the  result  appears  to  be  different.  The 
need  to  replace  the  lost  goods  makes  a  demand  for  special 
kinds  of  labor  or  goods.  There  may  be,  therefore,  an  immedi- 
ate benefit  to  some,  which  obscures  the  corresponding  loss  to 
others.  If  a  part  of  the  income  of  the  loser  must  be  diverted 
from  other  uses  to  replace  the  wealth  destroyed,  those  from 
whom  he  would  have  bought  suffer  an  unexpected  falling  off. 
of  their  sales,  and  he  has  himself  gained  nothing.  The  net 
result  is  a  loss  of  wealth  and  gratification  to  the  community 
as  a  whole. 

There  is  a  real  exception  where  the  accidental  destruction 
removes  some  social  difficulty.  The  great  fire  in  London 
and  the  great  fire  in  Chicago  resulted  in  wonderful  im- 

381 


382 


WASTE  AND  LUXURY 


[CH.  40 


Intentional 
destruction 
of  wealth 
by  the 
owner 


provement.  When  an  old  city  is  built  almost  entirely  of 
wood,  each  owner  may  think  it  to  his  interest  to  keep  the 
old  buildings.  A  great  fire  sweeps  them  all  down  and  com- 
pels the  rebuilding  of  the  city  on  a  new  and  higher  standard. 
But  the  usual  social  result  of  accidental  destruction  is  a  loss. 
It  is  a  use  of  wealth  without  a  fulfilling  of  the  purpose  of 
production,  the  gratifying  of  wants. 

2.  The  intentional  destruction  of  wealth  ~by  the  owner, 
to  make  trade  good,  benefits  neither  himself  nor  others.  The 
case  in  mind  is  one  where  there  is  full  choice  between 
keeping  or  losing  the  good,  not  such  a  case  as  the  throwing 
overboard  of  a  part  of  the  cargo  when  the  ship  is  in  danger 
of  sinking,  in  the  hope  thereby  of  saving  the  rest,  or  as  the 
blowing  up  of  buildings  to  prevent  the  spread  of  a  fire.  In 
such  cases  the  destruction  is  inevitable  without  man's  action; 
he  merely  tries  to  minimize  it.  The  case  in  mind  is  the  de- 
liberate destruction  of  wealth  that  might  be  kept  for  use. 
One  labor  leader,  for  example,  boasted  that  when  he  drank 
pop  he  always  broke  the  bottle  "to  make  trade  good"  by 
helping  the  glass  industry.  The  refuting  of  this  fallacy  is 
one  of  the  time-honored  tasks  in  political  economy.  There 
is,  it  is  true,  an  increase  in  the  demand  for  glass  and  glass- 
blowers'  labor,  but  without  an  increase  in  gratification ;  but  at 
the  same  time  there  is  a  decrease  in  the  demand  for  other 
goods  which  would  afford  additional  gratification.  The  prov- 
erb, old  in  Shakespeare's  time,  runs,  "Nothing  can  come  of 
nothing."  What  is  spent  for  one  purpose  cannot  be  for  an- 
other ; ' '  you  cannot  eat  your  cake  and  have  it  too. ' '  A  given 
income  can  be  spent  in  one  of  many  ways,  but  not  in  all  ways 
or  even  in  two  ways  at  once.  It  is  a  question  of  this  or  that. 
At  the  same  moment  that  the  demand  for  pop-bottles  is  in- 
creased, the  demand  for  other  things  is  decreased,  possibly 
that  for  pop-corn  or  pop-guns  or  Populist  papers— who  can 
tell  ?  Such  a  form  of  benevolence  is  a  mistaken,  uneconomic 
attempt  to  provide  labor  for  one  man  by  taking  it  from 
another. 


$1]  WASTE  OF  WEALTH  383 

If  the  advocate  of  wealth-destruction  would  be  consistent, 
he  should  break,  not  merely  the  pop-bottle,  but  the  water- 
pitcher  and  the  table  as  well;  he  should  make  a  bonfire  at 
least  once  daily  of  his  clothing,  his  house,  and  its  furnish- 
ings; he  should  advise  blowing  up  the  steamboat  and  rip- 
ping up  the  railroad  when  they  have  carried  a  single  load  of 
passengers.  Thus,  when  all  men  were  naked  and  starving, 
and  civilization  had  sunk  to  savagery,  trade  would  have  been 
made  as  "good"  as,  by  the  policy  of  destruction,  he  could 
ever  hope  to  make  it. 

3.  The  intentional  destruction  of  wealth  owned  by  other  intentional 
persons  is  falsely  thought  to  benefit  trade  in  general.  The  JJJ^^J"1 
cases  referred  to  are  not  acts  done  with  criminal  motives,  but  wealth 
those  done  with  a  view  to  the  public  interest.  If  one  sets 
fire  to  the  property  of  another,  seeking  revenge  or  plunder, 
he  is  guilty  of  the  crime  of  arson.  But  what  shall  be  said  of 
volunteer  firemen  that  let  an  old  house  burn  down  to  provide 
labor  for  carpenters  and  "to  make  business  good"?  The 
duty  of  firemen  is  to  put  out  fires,  no  matter  what  the 
building  is;  but  they  choose  sometimes  to  be  ministers  to 
the  social  interest  as  they  interpret  it.  The  more  spent  for 
carpenters'  work  out  of  any  income,  the  less  can  be  spent 
for  other  objects.  It  is  true,  however,  that  if  in  a  small  town 
the  money  to  rebuild  is  borrowed  from  a  distant  loan  or 
insurance  company,  there  is  an  increase  in  employment  in 
that  town  for  one  season ;  and  that  is  as  far  as  most  men  try 
to  carry  their  economic  analysis.  Let  the  student  carry  it 
further. 

Servants  sometimes   excuse  the  breaking  of  dishes  and  The  seen 
furniture  on  the  ground  that  it  makes  work,  and  that  the  ^°^e 
employer  can  afford  it.    But  income  is  thus  diverted  from 
other  expenditure,  either  for  production  or  for  consumption. 
In  the  light  of  the  theory  of  wages,  it  would  appear  that 
carelessness  reduces  the  servant's  own  efficiency,  and  in  the 
long  run  the  loss  comes,  in  part  at  least,  off  the  wages  of  that 
particular  servant.    Bastiat's  discussion  of  the  broken  win- 


384 


WASTE  AND   LUXURY 


[CH.  40 


The  waste- 
ful use  of 
wealth 


Waste  in 

public 

outlay 


dow-pane  is  often  and  deservedly  quoted.  What  is  seen  is  a 
certain  immediate  benefit  that  the  glass-maker  and  glazier 
get;  what  is  not  seen  is  that  the  power  to  expend  an  equal 
amount  for  other  things  is  thereby  lost  by  the  owner  of  the 
house. 

4.  The  destruction  of  unnecessarily  large  value  to  secure 
a  given  gratification  is  not  economically  sound.  The  careless 
use  of  wealth  to  secure  an  inadequate  result  is  likewise 
justified  as  "making  trade  good."  The  blunder  that  com- 
pels the  rebuilding  of  a  wall  in  a  rich  man's  garden  is  an 
occasion  for  congratulation  to  those  who  see  in  it  a  happy 
provision  of  work  for  the  unemployed.  It  is  easy  to  forget 
that  the  proper  use  of  goods  is  the  final  step  in  production. 
According  as  goods  are  well  or  poorly  used,  the  production— 
that  is,  the  real  income  or  gratification  they  afford— is  large 
or  small.  Differences  in  skill  in  the  use  of  wealth  are  great. 
A  French  cook,  we  are  often  told,  can  make  a  palatable  soup 
from  what  goes  from  the  average  American  kitchen  into  the 
swill-pail.  Waste  in  the  use  of  goods  is  more  likely  to  be 
found  in  new  countries  where  wealth  comes  more  easily  and 
necessity  does  not  enforce  frugality. 

The  praise  of  waste  implies  the  error  noted  in  the  pre- 
ceding propositions.  Deliberately  securing  less  than  the 
maximum  result  from  wealth  is  merely  a  minor  degree  of 
the  intentional  destruction  of  wealth.  The  mistaken  view 
is  essentially  that  of  the  opponents  of  labor-saving  machin- 
ery. It  may  be  true,  if  the  interests  of  a  small  class  of  workers 
or  of  tradesmen  for  the  moment  are  looked  at ;  it  is  false,  if 
the  interests  of  society  as  a  whole  be  considered.  Far  more 
of  wisdom  lies  in  the  proverb,  "A  penny  saved  is  two 
earned."  The  economic  use  of  wealth  as  surely  adds  to 
wealth  (and,  ultimately,  to  the  income  of  society)  as  any 
other  mode  of  production. 

Some  government  expenditures,  as  for  river  and  harbor 
improvements,  are  sometimes  favored,  not  because  their  im- 
mediate purposes  are  good,  but  because  they  "make  work" 


§  II]  LUXUKY  385 

and  "distribute  money"  throughout  the  country.  This 
money  comes  from  taxation,  and  no  matter  what  the  system 
of  taxation,  the  burden  falls  on  some  one,  reducing  the  in- 
comes at  the  disposal  of  the  people  to  expend  for  objects  of 
their  own  choice.  If  the  work  is  not  worth  doing  for  itself, 
the  collection  of  money  in  small  amounts  from  many  tax- 
payers and  its  expenditure  as  a  large  sum  in  one  locality 
results  in  a  net  loss  to  society  as  a  whole.  Where  the  result 
is  worth  something,  but  not  enough  by  itself  to  justify  the 
expenditure,  the  fallacy  of  the  destruction  of  wealth  is 
present  in  a  smaller  degree.  Examples  are  seen  in  the  ex- 
treme use  of  pensions  and  in  some  public  subsidies. 

5.  The  supposed  benefits  of  destruction  and  waste  are  The  fail 
due  to  a  narrow  and  incomplete  view  of  the  question.  Let  ofwast< 
us  restate  the  ideas  that  have  been  touched  upon.  In  many 
cases  it  is  possible  that  one  person  may  benefit  by  another's 
mishap  or  folly  in  the  use  of  wealth.  The  complex  inter- 
relations of  men  in  society  make  this  inevitable.  But,  to  ap- 
preciate the  final  effects  of  such  action  upon  society,  one 
needs  but  to  go  back  to  the  essential  thought  of  wealth  and 
its  purposes.  As  the  average  efficiency  and  bounty  of  the 
world  fall,  so  fall  the  income  and  welfare  of  men.  As 
it  rises,  the  social  and  economic  levels  rise  also.  Every  kind 
of  economic  wealth  has  potentially  two  kinds  of  uses:  to 
gratify  wants— thus  fulfilling  its  destiny— or  to  be  con- 
verted into  higher  and  more  efficient  agents— consumption 
or  production.  That  the  possibilities  of  the  latter  are  bound- 
less is  overlooked  in  the  fallacies  here  criticized.  An  efficient 
world  would  be  the  result  of  "economy"  and  saving;  a 
wasted  and  used-up  world,  the  result  of  the  fallacy  of  the 
destruction  and  waste  of  wealth. 

§  ii.     LUXURY 

1.     Luxury,  while  variously  defined,  involves  always  the   Luxury 
thought    of  great   consumption   of  wealth   for   unessential   defined 


386 


WASTE  AND   LUXUKY 


[CH.  40 


pleasures.  It  is  not  possible  to  define  luxury  absolutely;  it 
is  a  relative  term.  Those  opposed  to  it  condemn  it  in  their 
definition  of  it,  as,  for  example:  "an  excessive  consumption 
of  wealth,"  or  "  devoting  a  relatively  large  amount  of 
wealth  to  the  satisfaction  of  a  relatively  superfluous  wafit." 
Those  who  take  a  more  moderate  and  favorable  view  say: 
"It  is  the  enjoyment  of  forms  of  wealth  not  obtainable  by 
the  mass  of  men."  The  difficulty  in  the  definition  as  well 
as  in  the  problem  of  luxury  is  that  it  involves  a  mixture  of 
economic  and  of  ethical  questions. 

2.  Luxury  is  erroneously  justified  by  some  as  giving 
employment  to  labor.  Typical  instances  are  extravagant 
dress  and  elaborate  balls  where  fine  and  costly  flowers,  dec- 
orations, music,  coaches,  require  the  expenditure  of  a  large 
amount  of  money.  It  is  said  of  the  Empress  Eugenie,  wife 
of  Napoleon  III,  that,  in  order  to  help  the  glove  industry  of 
France,  she  wore  no  pair  of  gloves  more  than  once ;  in  order 
to  help  other  French  industries,  she  purchased  many  silks 
and  laces.  It  is  a  very  comfortable  doctrine  to  some  people 
that  the  oftener  they  change  their  dress,  the  greater  bene- 
factors to  society  they  are.  A  few  years  ago  the  "Bradley- 
Martin  ball"  was  given  in  New  York  city.  It  was  possibly 
little  more  elaborate  and  expensive  than  many  another  ball, 
but  it  chanced  to  be  a  dull  time  for  news  and  the  papers  all 
over  the  land  gave  columns  to  its  discussion.  In  the  many 
interviews  with  ministers  and  business  men,  the  thought 
appeared  over  and  over  that  the  ball  had  at  least  the  merit 
of  giving  employment  to  labor. 

The  fallacy  of  this  is  essentially  the  same  as  that  in  the 
argument  for  waste  and  destruction.  From  the  fact  that 
these  particular  tailors,  musicians,  and  florists  would  have 
less  employment  if  this  ball  were  not  given,  it  is  falsely 
concluded  that,  but  for  this  ball,  this  particular  income,  or 
capital,  would  not  be  used  at  all.  The  average  of  employ- 
ment in  those  special  industries  which  minister  to  luxury 
is  the  result  of  and  is  determined  by  the  average  level  of 


§JIJ  LUXURY  387 

demand.  There  are  more  caterers  and  florists  in  Ithaca 
than  in  Hayt's  Corners.  A  more  than  ordinarily  gay  season 
gives  unusual  profits  to  these  enterprises,  and  it  is  true  that 
an  abrupt  and  extreme  falling  off  in  demand  would  cause 
them  large  losses,  and  leave  many  workers  lacking  employ- 
ment for  that  one  season.  But,  if  this  limited  demand 
became  usual,  capital  and  labor  would  shift  to  the  other 
industries  to  which  expenditure  had  shifted.  Other  modes 
of  expenditure  than  twenty-five  thousand-dollar  balls  are 
possible,  as,  for  example,  twenty-five  thousand-dollar  public 
libraries.  Mr.  Carnegie  takes  his  dissipation  in  that  form. 
That  gives  employment  also ;  not  less  does  investment  in  new 
houses,  in  new  railroads,  and  in  new  factories.  More  em- 
ployment of  a  particular  kind  of  labdr  is  caused  in  one  case 
than  in  another,  but  not  more  employment  of  labor  as  a 
whole  and  on  the  average. 

3.     //  all  extreme  luxury  ceased,  men  of  means  would  Results  of  a 
improve  durable  agents  more  or  would  give  more  or  would  a^^nein 
take  more  leisure  while  producing  less.     The  question  of  standards  of 
luxury  is  most  difficult  when  put  thus :  What  would  happen  Uvmg 
if  everybody  began  suddenly  to  live  on  the  simplest  food 
and  to  confine  himself  to  the  bare  necessities  of  life?     A 
sudden  change  of  this  sort  is  almost  unthinkable,  but  if  it 
took  place,  all  the  factories  and  agents  used  for  non-essen- 
tials would  lose  their  value  at  once.    A  great  industrial  crisis 
would    follow,    as    industry    would    have    to    adjust    itself 
abruptly  to  an  unprecedented  standard  of  desires.     What 
would  happen  if  that  standard  continued  would  vary  as 
human  nature  varies.    There  might  follow  increase  of  popu- 
lation,  or   a  heightening   of  the  efficiency  of  such  agents 
as  were  of  use,  or,  more  probable  than  all  else,  a  progressive 
lightening  of  labor,  a  use  of  the  surplus  of  energy  in  study, 
rest,  and  recreation.     It  is,  of  course,  illogical  to  suppose 
that  with   limited   desires   for  the   objective   goods  of  the 
world  there  would  continue  undiminished  efforts  to  produce 
goods  and  to  save  for  future  superfluities,     In  actual  life 


388 


WASTE  AND  LUXURY 


[CH.  4u 


Luxury  as 


progress 


Happiness 
and  the 

simple  life 


changes  of  standard  occur  gradually.  Economizing  in  ma- 
terial things  by  simpler  living  makes  possible  not  only  the 
increased  efficiency  of  productive  agents  but  the  increased 
enjoyment  of  immaterial  goods. 

4.  T^  defenders_j)f  luxury  claim  that^t  is  the  great 
incentive  to  progress*   It  is  undoubtedly  true  that  a  dead 
level  of  conditions  iJTunfavorable  to  the  progress  of  society. 
There  must  be  in  society  some  motive  for  emulation  and  am- 
bition after  the  bare  necessities  of  life  are  provided.    There 

s^is  therefore  much  strength  in  the  defense  of  luxury.  Neces- 
sities, strictly  understood,  are  things  absolutely  essential 
to  life  and  health.  No  hard  line  can  be  drawn  between 
necessities  and  comforts,  between  comforts  and  luxuries.  The 
level  rises ;  it  is  a  trite  and  true  saying  that  the  luxuries  of 
one  age  become  the  necessities  of  the  next.  The  rise  of  the 
bath-tub  in  the  nineteenth  century  is  an  epitome  of  the 
progress  of  civilization  in  that  period.  The  free  baths  in 
our  cities  surpass  the  hopes  of  the  wealthy  of  a  century  ago. 
Even  the  meaner  motives  of  envy  may  have  their  social 
function.  The  lower  social  grades,  emulous  of  the  higher 
standard  held  before  them,  labor  with  greater  energy.  The 
successful  and  capable,  not  content  with  necessities,  continue 
to  give  their  efforts  to  production.  The  destruction  of  the 
motive  of  luxury  before  the  development  of  a  substitute 
in  a  higher  social  conscience,  would  be  paralyzing  to  industry. 
Luxury  in  a  moderate  measure  may  be  defended  by  the  same 
arguments  as  those  for  private  property.  True  as  this 
view  may  be  in  many  cases,  in  others  it  seems  directly  op- 
posed to  the  facts.  Let  us  look  at  the  economico-moral 
questions  involved  from  the  side  of  the  individual  who  is 
indulging  in  luxury,  and  from  that  of  the  society  in  which 
he  lives. 

5.  As  a  question  of  consumption  luxury  involves  for  the 
individual  both  an  economic  and  a  moral  problem.     The 
economic  question  is,  Does  luxury  enhance  the  man's  real 
income?    Does  a  greater  expenditure  on  himself  give  him  a 


§  II]  LUXUEY  389 

larger  sum  of  gratification  in  life  than  a  moderate  expendi- 
ture would  give?  Ostentation  has  its  penalties.  Undue 
striving  after  effect  defeats  its  own  purpose.  This  is  the 
cold  fact  of  experience,  not  a  speculative  proposition.  To 
get  back  to  the  fundamental  principle:  gratification  results 
from  a  harmonious  relation  between  man's  nature  and  the 
world.  Life  loaded  with  too  much  luggage  staggers  under 
the  burden.  The  tired  faculties  of  the  Sybarite  cease  at 
length  to  respond  to  natural  pleasures.  When  the  senses 
are  robbed  of  their  fineness,  youth  grows  blase,  mature  man- 
hood is  ermuied,  life  is  empty.  The  praise  of  "the  simple 
life"  has  lately  been  heard  in  a  quarter  whence  such 
counsel  does  not  usually  come.  In  gay  Paris,  a  wise  pastor 
has  made  one  of  the  most  beautiful  and  rational  pleas 
for  plain  and  sincere  living  that  society  has  heard  since 
the  time  of  the  stoic  philosophers.  The  word  is  needed. 
With  the  growth  of  incomes  grows  the  strain  to  reach  the 
self-imposed  standards  of  frivolity.  Insanity  and  suicide 
are  on  the  increase.  The  stress  of  modern  life  makes  men 
yearn  for  the  simpler  joys.  Happiness  dwells  not  outside  of 
men ;  they  must  seek  it  within. 

An  economic  failure,  luxury  is  likewise  in  most  cases  a  Luxury  vs. 
moral  failure.     Morality  has  to  do  with  others;  the  social  ^^re 
aspect  of  luxury  is  its  effect  on  other  people.     The  mere 
spending  of  a  large  income  in  selfish  indulgence  absorbs  all 
the  energies  and  interests  of  some  men  and  women.     Not 
only  happiness  in  the  narrow  sense,  but  self-realization,  is 
to  such  lives  impossible.    Those  absorbed  in  display  can  give 
no  due  measure  of  thought  to  social  obligations.    A  society 
made  up  of  self-absorbed  and  self-centered  individuals  is  a 
selfish  society,  foredoomed  to  decay. 

6.     The  larger  moral  problem  involved  in  luxury  is  con-  Luxury 
nected  with  distribution  or  the  justice  of  the  income,  rather  c^enmed 
than  with  consumption  or  the  spending  of  the  income.    The 
individual  effects  of  luxury  broaden  thus  into  the  larger 
social  effects.     Most  of  the  enemies  of  luxury  condemn  all 


390 


WASTE  AND  LUXURY 


[OH.  40 


Increasing 
social  uses 
of  wealth 


expenditure  of  wealth  above  a  very  moderate  sum,  declaring 
that  it  is  "unjust"  for  one  man  to  have  much  while  others 
are  in  poverty.  This  communistic  doctrine  pervades  the 
teaching  of  many  moral  teachers,  pagan  and  Christian.  In 
many  ways  a  public  opinion  can  be  developed  to  disapprove 
and  condemn  ostentation.  Frivolous  display  becomes  bad 
taste.  Flaunting  riches  meet  the  public  frown.  The  spend- 
ing of  income  for  dress  and  display  has  never  been  success- 
fully forbidden  by  law.  The  Middle  Ages  are  full  of  futile 
sumptuary  laws  which  sprang  from  the  envy  of  the  nobles 
for  the  wealthy  merchants.  The  growth  of  good  taste  may 
do  what  formal  law  found  impossible. 

The  use  of  wealth  in  these  days  is  taking  more  social 
directions.  It  turns  from  dress  toward  education,  art,  music, 
and  travel;  then  ceases  to  be  applied  merely  to  self  and 
family,  and  benefits  the  community.  Nowhere  and  never 
before  has  this  movement  gone  so  far  as  in  America.  An- 
drew Carnegie,  with  his  gifts  of  millions  annually  to  public 
libraries ;  Peter  Cooper,  founder  of  the  People 's  Institute ; 
Ezra  Cornell,  the  patron  and  prophet  of  the  modern  type 
of  higher  education — are  citizens  of  a  kind  better  known  in 
this  country  than  in  any  other, 
justice  of  The  immorality  of  luxury  rests  in  most  minds  on  the 

the  large  in-  conviction  that  it  is  unjust  that  any  one  should  have  so 

come  • 

large  an  income  to  use.  The  question  of  luxury  leads  back 
to  the  question  of  distribution :  Has  the  man  honestly  gained 
his  wealth?  If  so,  he  may  spend  it  with  good  judgment  or 
poor,  with  good  taste  or  bad,  but,  so  long  as  he  does  not  injure 
others  in  the  spending  of  it,  there  is  much  vagueness  and 
confusion  in  the  talk  of  "justice"  or  "injustice."  Each 
must  in  large  measure  be  his  own  judge  of  the  wisdom  of 
expenditure.  Luxury  is  not  always  a  question  of  wealth. 
Every  person  of  moderate  income  has  relatively  superfluous 
and  expensive  tastes.  One  spends  more  for  music  than  many 
a  millionaire  does ;  another  more  for  books.  How  many  col- 
lege students'  budgets  could  pass  the  censorship  of  Hetty 


§11] 


391 


Green,  reputed  to  be  the  richest  woman  in  America  1  If 
expenditures  were  regulated  by  the  public,  few  persons 
would  be  within  the  law.  But  whatever  the  goods  that  are 
bought,  if  income  is  unjustly  acquired,  if  its  distribution 
is  by  rules  that  do  not  give  the  best  possible  approach  to 
social  service,  there  may  well  be  talk  of  injustice.  There  is 
need  of  better  standards  of  taste  and  judgment  in  expendi- 
ture, but  not  of  sumptuary  laws.  If  there  is  any  legal 
change,  it  should  be  rather  in  the  law  of  property. 


repression 
of  luxury 
,inadvisabl 


Essential 
mark  of  the 
consump- 
tion of  goods 


Consumers' 
choice  as 
influencing 
value 


CHAPTER  41 
REACTION    OF    CONSUMPTION    ON    PRODUCTION 

§  I.       REACTION    UPON    MATERIAL    PRODUCTIVE    AGENTS 

1.  Economic  consumption  is  the  enjoyment  of  the  utili- 
ties which  wealth  is  capable  of  affording.     All  wealth  looks 
toward  consumption.     To  take  away  the  prospect  of  the  en- 
joyment of  goods  is  to  take  away  all  their  value.     Consump- 
tion  involves   generally   the   using   up   of   a   thing.      Food 
is  consumed  quickly,  clothing  more  slowly,  and  houses  wear 
out  after  many  years.    The  using  up  is,  in  some  cases,  due  to 
the  forces  of  nature,   and  is  not  hastened  by  enjoyment. 
A  house  goes  to  ruin  more  rapidly  if  uninhabited  than  with 
a  careful  tenant;   clothing  is   destroyed   more   quickly  by 
moths  than  by  wear.     The  use  of  many  goods  that  give 
esthetic  pleasures,  as  art,  painting,  sculpture,  and  the  en- 
joyment of  fine  scenery  or  of  beautiful  building  sites,  does 
not  destroy  the  things  that  afford  the  pleasure.     The  idea 
that  all  value  originates  in  labor  has  led  to  false  views  on 
this  question.     The  essential   mark  of  consumption  is  the 
using  of  the  income  as  it  arises,  not  necessarily  the  using 
up  of  the  material  agents  that  afford  it,  though  this  fre- 
quently occurs  as  well. 

2.  The  kind  of  consumption  affects  the  value  of  material 
agents.     Each  buyer  helps  to  determine  the  use  of  produc- 
tive agents.     The  control  of  purchasing  power  means  the 
potential  control   of  industry  to  that  degree.     It  was  ne- 
cessary in  discussing  the  enterpriser  to  recognize  that  the 
buyer   eventually   dictates   the   direction   of   industry;   the 

392 


§1]      REACTION  UPON   MATERIAL   PRODUCTIVE   AGENTS    393 

enterpriser  seeks  to  produce  that  for  which  there  is  most 
demand.  A  change  of  taste  affects  the  value  of  natural 
agents.  An  increase  in  the  demand  for  meat  affects  the 
value  of  wheat  and  potatoes,  and  also  the  land  used  for 
producing  them.  A  change  in  the  national  diet  may  be 
equivalent  to  the  discovery  or  to  the  destruction  of  half 
a  continent.  If  one  chooses  to  drink  wine  instead  of  buying 
statuary,  he  increases  the  value  of  vineyards  and  decreases 
that  of  marble  quarries:  If  one  drinks  beer,  he  bids  for 
barley;  if  he  eats  candy,  he  may  be  offering  a  bounty  for 
beets.  Therefore,  choosing  vines  or  violets,  pictures  or  pret- 
zels, each  with  his  nickel  helps  to  determine  what  shall  be 
produced. 

The  distribution  of  wealth  thus  affects  the  value  of  agents,  inventions 
The  wealthy  spend  relatively  more  for  luxuries,  the  poor  ^gncmg 
for  food  and  other  essentials.     Where  wealth  and  incomes 
are  very  nearly  equally  distributed,  the  demand  of  different 
families  will  be   for  much  the  same  kinds   of  goods.     If        ,,. 
there  were  no  rich  men,  the  demand  for  vineyards  producing 
fine  wines  would  be  less.     The  very  best  qualities  of  goods 
take  on  the  highest  prices  when  there  is  a  small,  but  very 
wealthy,  class  of  purchasers. 

Inventions  often  shift  demand,  and  value  follows.  The 
invention  of  the  bicycle  with  pneumatic  tires,  coincident 
with  the  adoption  of  electric  traction  for  street  cars,  reduced 
the  price  of  horses  between  1890  and  1895.  This  doubtless 
was  a  factor  in  agricultural  land  values  at  that  time.  This 
change  was  sudden,  extreme,  and  temporary,  and  there  has 
since  been  a  gradual  adjustment  and  a  return  to  the  former 
values. 

3.     The  production  of  the  next  period  may  be  radically  consumers' 
affected  ~by  the  use  now  made  of  agents.    Some  consumption  ^g^*8 
takes  the  form  of  using  up  and  reducing  the  stock  of  wealth,  productive 
The  demand  for  lumber  causes  the*  disappearance  of  the  forces 
forests,  whereas  the  demand  for  oranges  stimulates  the  plant- 
ing of  orange  trees.     The  reckless  exploitation  of  natural 


394        REACTION   OF   CONSUMPTION   ON   PRODUCTION     |CH.  41 


Consumers' 
choice  as 
affecting 
wages 


J 


resources  leaves  society  poorer.  Great  herds  of  buffalo  were 
slaughtered  to  get  the  hides,  which  were  of  comparatively 
slight  value.  Rich  land  has  been  exhausted  to  get  a  few 
harvests. 

War  is  a  use  of  wealth  for  ends  believed  at  the  time  to  be 
necessary  and  believed  to  forward  social  welfare  better  in 
the  long  run  than  would  dishonorable  submission ;  but  it 
causes  misery  and  leaves  industry  prostrate.  The  forms 
taken  by  saving  are  affected  by  the  choice  of  expenditure. 
In  war  the  savings  of  individuals  are  given  to  the  govern- 
ment and  used  for  destructive  purposes.  The  lender  parts 
with  his  wealth  and  society  uses  it  up.  While  the  lender 
has  a  claim  on  the  industry  and  on  the  remaining  property 
of  the  community,  society  as  a  whole  is  the  poorer.  If  the 
savings  had  taken  the  form  of  public  buildings,  libraries, 
railroads,  and  factories,  the  wealth  and  income  of  society 
as  a  whole  would  have  been  enhanced. 

4.  The  kind  of  consumption  affects  the  wages  of  the 
various  classes  of  labor.  That  an  increase  in  the  supply  of 
a  given  grade  of  labor  reduces  its  wages  and  encourages  its 
use,  and  vice  versa,  is  a  truth  that  became  familiar  in  the 
study  of  wages.  An  influence  also  is  exerted  from  the  side 
of  goods  upon  the  price  of  labor.  A  shift  of  demand  from 
one  kind  of  goods  to  another  depresses  the  wage  of  the  one 
kind  of  labor  and  raises  that  of  the  other.  A  low  grade  cf 
labor  that  performs  only  simple  tasks,  and  those  but  badly, 
is  injured  if  demand  shifts  to  better  products.  Back  of  the 
sweat-shop  shirt  is  the  problem  of  the  inefficient  worker. 
Progress  takes  place  by  the  effort  of  labor  to  increase  its 
efficiency  and  to  move  into  higher  paid  callings,  and  at  the 
same  time  by  the  desire  of  the  purchaser  to  buy  as  good  a 
quality  as  he  can. 

;  Every  buyer  then  determines  in  some  degree  the  direction 
f  industry.    The  market  is  a  democracy  where  every  penny 
ives  a  right  of  vote.    It  is  the  thought  of  the  society  called 
"The  Consumers'  League"  that  through  purchases,  pressure 


$HJ  KEACTION  UPON  EFFICIENCY  OF    WORKERS  395 

may  be  brought  to  bear  upon  the  employer  to  provide  better 
conditions  of  work.  The  members  of  The  Consumers' 
League  refuse  to  buy  goods  not  made  under  sanitary  condi- 
tions. Undoubtedly  there  is  here  a  great  economic  force 
which  an  enlightened  public  opinion,  even  without  a  formal 
association,  can  make  in  large  measure  effective.  Every 
individual  may  organize  a  consumer's  league,  leaguing  him- 
self with  the  powers  of  righteousness.  Will  he  read  a  yellow 
journal  or  a  pink  or  a  white  one  ?  A  nickel  or  two  will  buy 
either.  He'  has  a  dollar ;  will  he  go  to  the  theater  or  buy  ten 
dishes  of  ice-cream?  He  decides  to  buy  a  book,  and  more 
type  and  paper  are  made,  and  more  printers  are  employed ; 
he  subscribes  to  foreign  missions  and  Christian  workers 
penetrate  farther  into  Africa.  Every  purchase  has  far- 
reaching  consequences.  You  may  spend  your  monthly  al- 
lowance as  an  agent  of  iniquity  or  of  truth.  You  cannot 
escape  a  choice  even  by  burying  the  money,  for  that  is 
either  a  demand  for  gold  or  a  gift  to  the  issuer  of  paper 
currency. 

§  II.      REACTION  UPON  THE  EFFICIENCY  OF  THE  WORKERS 

1.     All  consumption  works  some  temporary  change  in  the  instinctive 
consumer,  making  him  a  more  or  less   efficient  producer.  Jjj^a* 
Most  consumption  goods  are  used  to  gratify  a  wish  of  the  welfare 
moment.    Many  actions  are  governed  by  impulse  rather  than 
by  reason ;  but  in  general  this  impulse  is  in  harmony  with 
the  interests  of  efficiency.     In  primitive  society  instinct  and 
appetite  must  generally  have  been  safe  guides.     Food  not 
merely  appeased  hunger  and  gratified  the  palate,  but  it  gave 
strength.     Sensations  of  cold,  hunger,  and  thirst  were  de- 
veloped by  nature  to  stimulate  men  to  do  the  things  that 
helped  them  to  survive.    In  primitive  societies  there  are  few 
chances  to  seek  pleasures  that  are  not  favorable  to  efficiency. 
In  the  struggle  for  existence  the  more  efficient  tribes  survive, 
and  those  that  develop  many  abnormal  tastes  must  perish. 


396        REACTION  OF  CONSUMPTION  ON  PRODUCTION     [CH.  41 

But  the  conditions  of  modern  life  are  more  complex,  and 
temptations  beset  men  on  every  side.  Tastes  are  pampered 
and  appetite  is  gratified  at  the  expense  of  later  welfare. 

choice  of  2.  The  physical  efficiency  of  the  worker  is  conditioned 

on  wise  consumption.  Chemists  and  physiologists  are  telling 
now  in  accurate  terms  how  the  nutritive  values  of  foods 
differ.  Food  values  are  not  measured  by  the  pleasure  af- 
forded the  palate.  The  wide  variety  and  greater  choice  now 
possible,  even  to  the  modest  purse,  make  the  chance  of  error 
much  greater  than  in  simpler  conditions.  This  subject,  al- 
ready touched  upon  in  the  sections 'on  the  efficiency  of  labor, 
deserves  further  notice.  From  youth  to  age,  the  foolish 
choice  of  goods  yields  its  harvest  of  ultimate  misery. 
When  babies  are  fed  on  crackers  dipped  in  coffee,  or,  as 
among  the  Italian  immigrants,  on  stale  bread  dipped  in  sour 
wine,  there  is  a  poor  foundation  laid  for  a  vigorous  man- 
hood. Rich  and  poor  cook  too  much  for  taste  and  too  little 
for  nutrition  or  digestion.  Much  cooking  is  still  done  in 
\  ways  fit  only  for  our  grandfathers  who  had  cast-iron 
1  stomachs  and  worked  in  the  open  air.  Culinary  methods 
have  not  been  adapted  as  yet  to  a  sedentary  life. 

Of  drinks  Drinking  tempts  some  men  not  only  by  taste,  but  by  the 
appeal  to  sociability;  to  other  coarser  natures  the  joys  of 
Bacchus  offer  the  one  hope  of  exhilaration.  The  pleasure 
from  alcoholic  liquor  may  at  the  moment  outweigh  the 
cost  in  money,  but  a  diseased  appetite  forbids  any  reckoning 
of  the  vast  psychic  cost  that  follows.  The  coin  paid  for 
the  drink  is  the  beginning  of  the  expense ;  misery,  disgrace, 
degeneracy,  and  bestialty  too  often  are  the  unreckoned 
items. 

of  clothing  Clothing  is  primarily  for  ornament,  secondly  for  physical 
comfort.  That  was  the  historical  order,  and  it  is  the  logical 
order  in  most  minds  to-day.  How  badly  the  two  needs  are 
harmonized!  No  wonder  that  the  savage  suffers  in  adopt- 
ing civilized  dress.  Travelers  describe  the  African  potentate, 
attired  in  a  high  hat  and  a  bracelet,  striving  to  outshine 


§11]  REACTION  UPON  EFFICIENCY  OF  WORKERS  397 

his  rival  resplendent  in  full-dress  coat  and  a  palm-leaf  fan. 
Civilization  is  making  headway  there;  but  the  student  of 
primitive  peoples  finds  one  of  the  important  causes  of 
their  decay  to  be  their  bad  judgment  in  adopting  civilized 
dress,  unsuited  to  their  customs  and  climate.  A  mistake  is 
made  likewise  by  workers  in  physical  tasks  in  imitating  the 
dress  of  the  wealthy  and  professional  classes.  The  dress  of 
the  higher  classes  often  is  chosen  because  of  its  unsuitable- 
ness  for  an  active  worker.  It  serves  thus  to  mark  its  wearer 
as  one  engaged  in  delicate  tasks  or  as  a  person  of  leisure. 
Possibly,  therefore,  because  of  their  strong  social  ambitions,  \ 
the  manual  workers  in  America  more  than  elsewhere  adopty 
a  costume  that  is  not  sensible  or  sanitary. 

3.  The  intelligence  of  the  worker  is  affected  by  the  form  Reaction  of 
of  his  enjoyments.  This  does  not  refer  to  the  use  made  of  enjoyment 
spare  time  for  regular  study  in  night  schools,  correspon-  intelligence 
dence  schools,  vacation  work,  but  to  the  use  of  time  when 
seeking  recreation.  The  choice  of  recreation  reacts  upon  the 
nature  of  the  man.  Will  he  read  a  book  or  play  billiards? 
In  proper  proportions  both  may  be  good,  in  excess  both  are 
evil.  Liking  realism,  does  he  read  Howells  or  the  blood- 
curdling serial  entitled  ''Piping  the  Mystery"?  Does  he 
devote  his  spare  hours  to  the  "Scientific  American"  or 
to  the  "Police  Gazette"!  At  the  moment  there  may  be  as 
much  pleasure  in  one  as  in  the  other  (and  one  might  add, 
in  Hibernian  phrase,  "Yes,  and  more  too.").  Does  he 
enjoy  music,  the  theater,  or  the  cheaper  attractions  of 
Coney  Island  and  the  Bowery  ?  Is  his  recreation  permeated 
with  a  certain  intellectual  ambition?  There  may  be  just  as 
much  momentary  joy  in  one  choice  as  in  another,  and  life  is 
shaped  by  the  direction  of  one 's  enjoyments.  Much  depends 
on  the  natural  bent;  some  natures  incline  to  the  healthy  as 
the  plant  grows  toward  the  sun.  With  most  characters  much 
depends  on  the  influences  of  neighborhood  life;  thus  the 
boy's  clubs  and  college  settlements  of  the  cities,  the  schools 
and  playgrounds  of  the  villages,  are  tending  to  surround 


398        REACTION  OF   CONSUMPTION  ON  PRODUCTION     [CH.  41 


Reaction 
upon  the 
character 


child  life  with  healthier  conditions,  that  will  mould  it  into 
better  social  habits. 

4.  The  form  of  the  worker's  expenditures  affects  his  in- 
dustrial virtues.  This  is  not  a  moral  lecture ;  it  is  a  look  at 
the  economic  side  of  the  subject.  There  are  some  moral 
qualities,  however,  that  are  closely  connected  with  efficiency, 
while  others  are  not.  Some  individuals  are  corrupt  in  pri- 
vate personal  relations,  but  " square"  in  business  dealings. 
But  usually  there  is  some  connection  between  the  two,  and 
under  modern  conditions  this  is  becoming  closer.  Fitness 
for  daily  tasks  is  affected  by  the  daily  thoughts  of  the 
worker.  Sordid  and  foul  thoughts,  like  an  internal  malady, 
sap  the  economic  efficiency  of  the  worker;  clean,  bright 
thoughts  act  as  a  tonic.  Drink,  gambling,  fast  living,  unfit 
men  for  positions  of  trust,  while  many  pastimes  leave  the 
moral  nature  cleaner  and  stronger.  Few  can  live  a  double 
life— honorable,  conscientious,  and  exact  in  one  part  of 
the  day,  and  corrupt  in  another.  Dr.  Jekylls  and  Mr.  Hydes 
are  not  often  found  in  real  life.  The  habitual  train  of 
thought  in  leisure  hours  possesses  and  controls  the  man 
throughout  his  work.  It  is  said  that  "A  man  is  what  his 
work  makes  him,"  but  it  is  equally  true  that  a  man's  work 
tends  to  become  what  he  is.  A  man  fit  for  a  higher  kind  of 
work  rises  to  it  in  the  usual  order  of  things;  but  no  matter 
how  humble  the  task,  it  partakes  of  the  worth  and  whole- 
someness  of  its  doer. 


Production 
vs.  welfare 


§  III.      EFFECTS   ON   THE   ABIDING  WELFARE   OF   THE    CONSUMER 

1.  Man  and  his  welfare  are  the  end  and  aim  of  the  eco- 
nomic process.  The  starting  point  of  industry  is  wants ;  the 
goal  is  welfare.  Momentary  gratification  is  only  a  way- 
station,  not  the  journey's  end.  Too  often,  in  economic  rea- 
soning, things  are  looked  at  from  the  employer's  point  of 
view.  The  older  writers,  such  as  Ricardo  and  Mill,  were 
inclined  to  take  what  John  B.  Clark  has  called  the  "feed 


$ni]  EFFECTS   ON   ABIDING   WELFARE  399 

and  work"  view,— the  view  that  the  workman  is  merely  an 
agent  of  production,  a  means  to  an  end;  that  his  food,  the 
same  as  coal  for  an  engine,  is  to  be  thought  of  rather  as 
employer's  cost  than  as  consumer's  gratification.  But,  in 
the  broader  view,  the  welfare  of  men  as  men  is  the  subject 
most  worthy  of  economic  study.  The  workman's  food  is  to 
gratify  his  hunger,  primarily ;  not  merely  to  make  him  a  bet- 
ter working  machine.  This  reverses  the  order  of  the  older 
reasoning.  The  use  made  of  the  income  is  itself  a  kind  of 
production— its  last  stage.  Is  the  process,  on  the  whole, 
worth  while  ?  This  can  only  be  judged  by  finding  whether, 
on  the  whole,  the  welfare  of  man  has  been  furthered. 

2.  An  income  yielctsthe  maximum  gratification  when  it  Themar- 
is  apportioned  among  goods  so  that  tkeir  marginal  utilities,  ^^fJJ1 
as  nearly  as  possible,  are  equal.     Even  a  small  income  is  income 
capable  of  many  applications.     The  choice  lies  among  many 
thousands  of  articles.     Utility  varies  not  only  according  to 

the  kinds  of  good,  but  according  to  the  varying  quantities 
of  each.  Every  moment,  therefore,  the  conditions  of  a  choice 
are  changing.  The  best  use  of  income  forbids  the  purchase 
of  an  additional  unit  of  any  good  unless  it  affords  the  high- 
est gratification  obtainable,  at  the  moment,  at  an  equal  price. 
Various  circumstances  prevent  the  exact  application  of  this 
rule.  Expenditure  is  a  matter  of  habit,  in  large  measure, 
rather  than  a  matter  of  judgment.  The  knowledge  needed 
for  a  rational  choice  very  often  is  lacking.  Appetites  change,  ^ 
making  unwise  the  old  purchases,  yet  men  go  on  buying 
the  same  things  in  the  same  proportions  simply  because 
a  readjustment  that  would  give  greater  gratification  requires 
thought.  Finally,  the  best  economic  adjustment  must  con- 
form to  the  abiding  physical  and  moral  welfare  of  the  user, 
not  to  a  temporary  impulse ;  and  such  a  choice  is  far  more 
difficult  than  that  of  the  temporary  good. 

3.  Progress  takes  place  where  new  wealth  gratifies  mar-   Progress 
ginal  wants  as  intense  as  those  of  the  preceding  period.     If  ^g^ent 
the  utility  of  every  kind  of  goods  decreased  uniformly  as   of  desires 


/ 


400        REACTION  OF   CONSUMPTION   ON  PRODUCTION     [CH.  41 

wealth  increased,  desire  would  steadily  decline  in  intensity. 
But  old  wants  vary  and  new  wants  develop  with  prosperity. 
Desire  grows  by  what  it  feeds  on.  Ambition  passes  on  to 
other  and  higher  peaks.  The  direction  of  the  individual 
man's  life  thus  is  determined  by  the  expenditure  of  his  in- 
creasing income.  Wealth  makes  possible  a  new  adjustment 
of  life,  a  new  character,  both  in  the  individual  and  in  the 
society. 

wealth  a  The  thought  that  needs  emphasis  in  this  connection  is  that, 

living  to  \  wnn<e  production  and  consumption  are  separable  in  thought 
\  and  distinguishable  in  practice,  they  are  not  opposed  in  their 
ultimate  purpose.     The  highest  fruits  of  production  are  in 
the  lessons  of  sacrifice  and  discipline,  and  in  its  opportunities 
for  experience  and  self-expression.     The  best  result  of  the 
;    consumption  of  wealth  is  not  the  gratification  of  appetite, 
but  the  strengthening  of  the  spiritual  forces  within  men. 
The  world  is  to  rise  to  a  higher  social  stage  not  by  banishing 
labor  and  by  multiplying  sensual  enjoyments  of  the  com- 
moner sort.     Wealth,  even  in  an  economic  view,  is  not  the 
end  of  life,  but  merely  the  means  to  its  realization, 
variety  and       4.     Enjoyment  is  increased  by  a  proper  variety  and  har- 
h^m°nyin    mony   of  goods.     As  the   old  kinds  of  goods   increase  in 
goods  amount  and  fall  in  value,  there  must  be  a  substitution  of 

new  goods.  An  element  added  to  the  dress  or  to  the  diet 
heightens  greatly  the  total  gratification.  The  result  is  a  unit. 
Think  of  a  dinner  without  butter,  or  a  cranberry-pie  without 
sugar,  or  a  dress-suit  without  a  linen  collar.  Certain 
combinations  are  essential  to  the  requirements  of  developed 
taste  and  present  a  problem  of  complementary  goods.  Com- 
binations of  complementary  goods  enhance  the  enjoyment; 
inharmonious  combinations  decrease  it.  That  certain  things 
"go  together"  is  a  fact  that  rests  often  in  the  nature  of 
things.  Complementary  colors  please  the  eye ;  well-seasoned 
dishes  please  the  palate. 

Again,  the  harmony  of  goods  is  affected  by  the  special 
nature  of  the  occupation.     A  farmer  with  his  out-of-door 


;  UIJ  EFFECTS   ON   ABIDING   WELFARE  401 

life  can  use  tobacco  with  far  less  danger  than  the  sedentary 
worker.  A  piano  player  cannot  be  a  base-ball  player :  the 
one  requires  soft  and  supple  hands,  the  other  hard  and 
callous  ones.  The  young  man  must  give  up  the  piano  or 
the  game,  or  play  both  badly.  The  harmony  may  rest  on 
a  still  more  complex  social  adjustment.  The  loss  to  the  man 
whose  life  is  in  the  main  on  a  higher  plane  is  greater  if 
he  descends  occasionally  to  a  lower,  A  ditch-digger,  looking 
at  the  question  short-sightedly,  may  deem  "a  good  drunk" 
a  very  desirable  form  of  enjoyment.  But  a  brain-worker,  I 
whose  joy  as  well  as  efficiency  depends  on  the  clearness  of 
his  intellectual  processes,  must  see  that  in  his  case  the  perils 
and  the  costs  are  much  greater^ 

Wise  consumption  depends  not  alone  on  physical  pleasures,   unity  of 
but  on  the  spiritual  unity  of  the  uses  made  of  goods.    Hap-  JjJ^^ 
piness  and  character  are  akin  in  the  qualities  of  simplicity  and  in 
and  unity.    Happiness,  so  far  as  it  depends  on  wealth,  is  a  cnaract 
harmony  of  gratifications.     Character  is  a  harmony  of  ac- 
tions, a  group  of  complementary  deeds.     There  can  be  no 
harmony,  without  a  central,  simple,  guiding  principle,  j  The 
wise  and  moral  use  of  goods  and  the  economic  use  of  them 
are  therefore  for  the  individual  essentially  the  same.     Life 
js^a  unity^    The  results  of  the  choice  of  goods  are  reflected  in 
the  health,  intelligence,  happiness,  morality,  and  progress  of 
society.    It  is  vain  for  the  economist  to  ignore  the  ultimate 
relations  between  economic  choice  and  morality;  it  is  folly 
for  the  moralist  to  ignore  the  economic  bases  of  right  and 
wrong  in  human  conduct. 


CHAPTER  42 
DISTRIBUTION    OF    THE    SOCIAL    INCOME 


Personal 
affection 
and  distri- 
bution 


§  I.       THE   NATURE   OF   PERSONAL   DISTRIBUTION 

1.  Personal  distribution,  in  economics,,  is  the  reasoned  ex- 
planation of  the  ways  in  which  income  is  divided  among  the 
members  of  the  community.    Before  noting  more  exactly  the 
ways  in  which  distribution  can  and  does  take  place,  it  may 
be  well  to  review  briefly  some  definitions  that  have  been 
given  in  other  connections.     Distribution  is  bound  up  in 
practice  with  production,  but  it  can  be  thought  of  as  a 
more  or  less  distinct  problem.    Functional  distribution  is  the 
attribution  of  value  to  agents  or  classes  of  producers,  to  land, 
machinery,  and  labor  considered  impersonally  as  groups  of 
productive  agents.     Personal  distribution  is  the  actual  ap- 
portioning of  income  to  living  persons.     This  theme  now  to 
be  dealt  with  is  the  more  important  practically,  for  the  ab- 
stract discussion  of  rent  and  interest  is  of  use  only  as  it 

lelps  to  an  understanding  of  this  vital  human  problem.  It 
"is  well  to  recall  also  the  distinction  between  wealth  income, 
loney  income,  and  psychic  income.  The  first  is  the  objective 
aspect,  the  last  is  the  subjective  aspect,  of  income;  the 
second,  money  income,  may  be  an  expression,  in  money  form, 
of  either  of  the  others,  but  commonly  of  the  former.  The 
money  expression  of  psychic  income  can  be  only  approx- 
imately attained. 

2.  The  individual's  income  is  determined  by  a  number  of 
forces,  only  part  of  which  are  primarily  economic.     Many 
persons  derive  income  directly  neither  from  property  nor 

402 


$IJ  THE  NATURE  OF   PERSONAL   DISTRIBUTION  403 

from  labor.  They  neither  toil  nor  clip  coupons,  but  they  flour- 
ish in  the  favor  of  others— parent,  husband,  wife,  friends, 
patrons.  So  long  as  the  good-will  continues  these  persons 
may  be  as  well  off  as  if  they  drew  a  salary  or  owned  a 
bank.  If  a  person  in  control  of  goods  shares  them  with  an- 
other, it  is  a  matter  that  economists  must  recognize,  but 
cannot  well  reduce  to  rules  of  value.  It  is  not  the  task  of 
economists  to  explain  why  the  impulses  of  generosity  arise,  • 
but  only  how  they  affect  distribution.  The  economic  prob- 
lem of  distribution  really  ends  where  owner  or  worker 
secures  his  income.  Giving  a  part  of  it  to  some  one  else 
is  essentially  a  form  of  consumption,  and  only  secondarily 
a  mode  of  distribution ;  it  is  the  way  chosen  to  spend  the 
wealth  income. 

The  psychic  income  of  individuals,  therefore,  is  often  made  complex 
up  of  many  elements.  Some  parts  are  due  to  services  per-  ^^ 
formed  by  the  person  himself.  When  one  combs  his  own  hair  incomes 
he  is  adding  to  his  income.  Benjamin  Franklin  said  it  was 
better  to  teach  a  boy  to  shave  himself  than  to  give  him  a  thou- 
sand dollars.  Other  goods  are  the  uses  and  fruits  of  legally 
controlled  wealth:  chance  finds,  as  gifts  of  value  or  lost" 
and  abandoned  goods;  goods  assigned  to  one  by  authority; 
wealth  inherited;  illegal  gains  by  robbery;  goods  secured 
on  credit;  gifts  either  of  things  or  of  services.  The  uses  of 
this  university  are  a  gift  forming  a  part, first, of  the  student's 
income,  and,  finally,  of  the  social  income.  Such  gifts  can 
be  traced  back  to  large-hearted,  public-spirited  men  like  Ezra 
Cornell,  but  they  must  be  looked  upon  as  coming  from  some 
one.  This  list,  incomplete  as  it  is,  suggests  that  the  real 
income  of  most  individuals  has  manifold  sources.  Let  us 
undertake  to  examine  and  analyze  the  various  methods  in 
actual  use  in  the  distribution  of  income  to  the  persons  mak- 
ing up  society. 


404 


DISTRIBUTION   OF   THE   SOCIAL  INCOME 


[CH.  42 


Compulsory 
(^'distribu- 
tion; vio- 
lence 


Chattel 
slavery 


War 
indemnities 


§  II.       METHODS    OF    PERSONAL    DISTRIBUTION 

1.  Distribution  is  sometimes  compulsory,  by  force  or 
fraud.  This  crude  and  primitive  mode  of  distribution,  the 
negation  of  personal  liberty,  never  has  been  quite  eliminated. 
In  every  country  an  unhappily  large  number  of  men  from 
time  to  time  break  over  into  crime,  from  violence  and  high- 
way robbery  down  to  sneak-thieving,  pocket-picking,  and 
bunco  games.  Not  more  than  ten  per  cent,  of  this  criminal 
element  is  at  any  one  time  in  prison.  This  method  of 
personal  distribution,  not  hinted  at  in  most  theories  of  dis- 
tribution, determines  a  large  part  of  the  income  of  tens  of 
thousands  of  men  in  this  country  and  concerns  the  distribu- 
tion of  millions  of  dollars.  These  enemies  of  society  appro- 
priate whatever  they  can,  and  the  law  stops  them  if  it  is 
able. 

Slavery  is  distribution  by  legalized  force,  but  the  force  is 
not  legalized  by  the  consent  of  the  victims.  The  evolution 
of  the  harsher  slavery  may  be  traced  through  various  forms 
of  milder  serfdom.  There  is  found  an  element  of  this  in 
the  freest  existing  societies ;  men  unwilling  are  forced  to  do 
things.  A  patent  example  is  the  convict  on  a  chain-gang,  a 
slave  to  society  as  a  penalty  for  his  violation  of  its  com- 
mands. But  some  radical  reformers  to-day  claim  that  pres- 
ent society  is  wholly  based  on  legalized  force,  and  that  the 
working-man  is  essentially  a  slave.  Their  ideal  cannot  be 
realized  without  dissolving  social  bonds  and  destroying  civi- 
lization ;  yet  the  presence,  even  in  our  society,  of  this  forced, 
unwilling  submission  on  the  part  of  some  of  its  members  can* 
not  be  ignored. 

A  similar  example  of  forcible  taking  is  seen  in  case  of-  war. 
Savage  tribes  plunder  and  take  captive  their  weaker  neigh- 
bors. Conquering  modern  nations  usually  exact  tribute  from 
defeated  enemies.  Germany  got  a  billion  dollars  from 
France,  Japan  a  quarter  of  a  billion  from  China.  The 


§IIJ  METHODS  OF  PERSONAL  DISTRIBUTION  "405 

terms  of  peace  at  the  close  of  our  great  Civil  War  were  the 
most  liberal  ever  granted  by  conqueror  to  vanquished;  and 
yet  the  federal  pensions  granted  to  Northern  soldiers  are  a 
form  of  tribute,  being  paid  by  taxes  falling  alike  upon  the 
North  and  the  South.  In  all  these  cases  the  distribution  by 
force  is  unwillingly  suffered.  In  none  of  them  is  it  redu- 
cible to  economic  rules  or  capable  of  a  strict  economic  ex- 
planation. 

2.  Distribution  may  be  charitable,  that  is,  determined  by  charitable 
considerations  of  benevolence -and  affection.  "Charitable  is 
here  used  in  its  original  sense,  as  synonymous  with  love  or  family 
affection.  First  to  be  mentioned  is  the  love  of  parents,  the 
root  and  type  of  all  the  forms  of  charity.  The  lack  of  eco- 
nomic equivalence  in  the  relation  of  parent  and  child  is 
complete  in  early  years..  The  helpless  infant  gives  nothing 
economic  to  the  parent,  the  parent  gives  all  to  the  child. 
Gradually,  however,  the  balance  is  regained;  as  the  years 
go  on,  not  only  does  the  child  repay  in  affection  but  in 
many  cases  he  repays  in  material  ways.  In  the  factory 
districts  and  on  the  farm  the  child  in  early  years  begins  to 
reestablish  the  balance,  becomes  a  worker,  and  contributes  as 
much  as  the  cost  of  his  support,  and  finally  more.  A  student 
of  modern  English  town  life  has  traced  the  curve  of  poverty 
traversed  by  the  average  child  of  the  poor,  as  the  family 
moves,  now  below,  again  above,  the  level  of  minimum  income 
required  for.  physical  efficiency.  In  the  middle  or  proper- 
tied classes  the  children  do  not  for  many  years  take  the 
burden  from  the  parents,  and  it  is  doubtful  whether  in  most 
cases  the  economic  balance  is  ever  reestablished.  It  is  not 
to  the  parents,  but  to  the  succeeding  generation,  that  the 
debt  is  vicariously  paid. 

Friendship  widens  the  range  of  generosity  and  multiplies  And  in 
the  mass  of  gifts.     Broad  sentiments  of  humanity  lead  to 
gifts  outside  the  range  of  personal  affection  and  personal 
interest,  to  the  beggar  on  the  street,  to  institutions  devoted 
to  charity.    In  New  York  state  about  twenty  million  dollars 


406  DISTRIBUTION  OF  THE  SOCIAL  INCOME  [CH.  42 

a  year  is  given  to  charity,  and  in  the  country  at  large  many 
times  as  much.  In  the  year  1901  over  one  hundred  million 
dollars  was  given  to  education  in  the  United  States  by  pri- 
vate donors;  and  that  high  mark  will  no  doubt  soon  be 
passed.  Gifts  in  cases  of  great  disasters,  as  the  Irish  and 
Indian  famines,  the  Chicago  fire,  the  Galveston  flood,  the 
eruption  of  Mount  Pelee,  bespeak  a  widening  generosity. 
Religion  impels  to  the  building  of  churches,  to  the  support 
of  priests,  missions,  and  manifold  religious  undertakings. 
Charity  in  this  connection  is  the  expression  of  a  sentiment 
that  varies  from  the  broadest  and  most  general  humanitarian 
sentiment  to  the  most  intense  and  ardent  personal  affection. 
Authorita-  3.  Distribution  may  be  by  an  authority  willingly  ac- 
butiorTin1"  knowledged.  The  two  preceding  forms  of  distribution,  force 
the  despotic  and  love,  shade  off  into  this  form.  In  them  the  ones  from 
whom  goods  are  taken  or  to  whom  they  are  given  have  no 
power  to  change  the  conditions ;  here  is  to  be  considered  the 
case  where  the  person  bows  willingly  to  the  superior  power 
and  takes  what  that  power  accords  him.  There  are  few  des- 
potisms in  which  the  government  is  not  based  on  the  wishes 
and  average  capacities  of  the  governed.  If  the  citizens 
as  a  body  really  desired  and  were  deserving  of  better  gov- 
ernment, in  most  cases  they  could  get  it.  Much  is  heard,  for 
example,  of  despotism  in  Russia,  and  of  the  abject  condition 
of  the  people;  but  travelers  testify  that  while  many  in  the 
educated  student  classes  are  filled  with  the  greatest  discon- 
tent, and  the  intelligent  subject  peoples,  such  as  the  Finns, 
detest  their  rulers,  such  sentiments  are  far  from  general 
throughout  the  empire.  The  power  of  the  Czar  could  not 
exist  for  a  single  moment  if  the  mass  of  the  people  did  not 
look  to  him  as  the  great  father  whom  they  venerate  and 
love.  If  this  is  true,  the  despotism  in  Russia,  though  abhor- 
rent to  our  ideals  of  freedom,  is  fitted  to  the  aspirations  of 
the  mass  of  the  people.  So  far  as  government  determines 
income,  the  authority  distributing  income  there,  as  else- 
where, is  one  willingly  acknowledged. 


§llj  METHODS   OF  PERSONAL  DISTRIBUTION  407 

In  patriarchal  tribes,  in  communal  societies,  in  monastic   in  com- 
munities 

and  families 


and  other  religious  orders  distribution  is  by   an  accepted  mumties 


authority.  Each  person  works  at  what  he  is  commanded  to 
do,  and  some  one  in  authority  (the  patriarch,  head  of  the 
community,  the  father  of  the  monastic  order)  portions  out 
the  work  and  the  reward.  In  the  family  this  rule  largely 
prevails,  and  even  after  the  children  have  come  to  years  of 
discretion  they  not  infrequently  accept,  from  habit  or  af- 
fection, the  will  of  the  parents,  and  give  up  their  entire 
wages  to  receive  back  a  portion.  The  method  of  charitable 
distribution  while  the  child  is  young  gradually  changes  to 
authoritative  distribution  after  the  child  becomes  a  worker. 
The  untrained  and  indocile  youth,  however,  is  made  the  sub- 
ject of  compulsory  distribution. 

The  collection  and  distribution  of  taxes  is  by  public  au-   in  much 
thority.    No  attempt  is  made  to  give  back  an  exact  equivalent  ^ne™1" 
to  the  tax-payer.    The  money  is  taken  and  spent  by  authority  action 
for  the  public  good.    This  method  is  exemplified  in  the  work 
of  certain  commissions  appointed  by  law  to  fix  rates  or  settle 
disputes,  as  boards  of  conciliation  and  arbitration  and  rail- 
way  commissions.     The   courts   sometimes   find   themselves 
obliged  to  enter  this  field,  although  they  do  so  most  un- 
willingly.    They  try  to  confine  their  efforts  to  interpreting 
the  contracts  men  have  voluntarily  entered  into,  and  they 
avoid,  so  far  as  possible,  the  making  of  contracts  or  the  fixing 
of  rates. 

In  many  cases,  little  thought  of  as  economic  distribution,   in  various 
the   authoritative  method  is   followed.     Literary  and  ora-  contests 
torical  contests  are  passed  upon  by  a  set  of  judges  whose 
opinion  of  merit  determines  the  award.    It  is  a  poor  method, 
often  resulting  in  injustice  (as  every  defeated  candidate  will 
admit) ;  but  it  is  the  only  way  practicable  for  deciding  such 
contests.    Yet  there  are  literary  and  oratorical  contests  de- 
cided very  differently.     If  a  man  advertises  himself  as  an 
orator  and  'charges  fifty  cents  admission  to  his  lecture,  every- 
one who  goes  to  hear  the  man  votes  that  he  is  an  orator; 


408  DISTRIBUTION   OF   THE   SOCIAL  INCOME  [CH.42 

everyone  having  money  but  staying  away  votes  that  he  is,- 
not  of  such  value.  The  one  is  judgment  by  the  authorita- 
tive, the  other  by  the  competitive,  method.  The  essence  of 
the  method  of  distributing  by  authority  is  that  one  individ- 
ual (or  group  of  individuals)  judges  of  the  deserts  or  duties 
of  others,  decides  what  others  must  get  or  must  pay,  not  what 
he  himself  is  willing  to  pay.  Authoritative  distribution 
is  necessary  in  many  cases,  but  it  is  fraught  with  dangers. 
It  is  the  essence  of  socialism  that  it  would  make  this  plan  uni- 
versal. 

4.     Distribution  of  psychic  income  may  be  in  part  by  the 

collective  use  of  social  wealth.    By  collective  use  in  the  full 

sense  is  meant  the  continuing  enjoyment  at  the  same  time 

by  all  caring  to  partake  and  without  limit  as  to  amount. 

Distribution       Now  it  is  evident  that,  because  of  difficulties  that  arise,  not 

bycoiiective  ajj   things  are  capable  of  this  kind  of"  enjoyment.     Free 

enjoyment  .  . 

water  for  private  use  from  public  waterworks  is  wasted; 
free  meals  and  clothing  to  school-children  are  open  to  still 
greater  abuses.  Men  cannot  thus  collectively  enjoy  rare 
wines  or  good  confectionery;  they  cannot  partake  without 
limit  of  a  limited  supply.  But  libraries  and  schools  may 
practically  be  managed  in  this  way.  They  require  both 
certain  qualifications  and  certain  sacrifices  on  the  part  of 
the  user.  Collective  enjoyment  is  most  completely  possible 
where  the  use  of  a  permanent  form  of  wealth,  such  as  a  park, 
can  be  made  free  to  the  public.  All  individuals  may  en- 
joy equal  privileges,  though  general  rules  may  limit  the 
kind  of  use ;  for  example :  no  one  may  be  permitted  to  pull 
flowers  or  to  walk  on  the  grass,  but  all  who  make  use  of  the 
park  enjoy  equal  privileges.  Henry  van  Dyke  in  one  of  his 
essays  puts  into  the  mouth  of  his  boy  the  question,  ' '  Father, 
who  owns  the  mountains'?"  and  the  answer  is,  He  who  can 
enjoy  them.  Every  man  without  covetousness,  as  he  stands 
on  this  hilltop,  owns  the  mountains,  the  lake,  and  this  beau- 
tiful valley. 

In  some  ways  the  amount  of  public   enjoyment   is  de- 


$IIJ  METHODS  OF  PERSONAL  DISTRIBUTION  409 

creasing,  as  by  the  growing  density  of  population,  by  the  loss 
of  open  spaces  and  commons  for  playgrounds,  by  the  de- 
struction or  fencing  in  of  natural  scenery ;  but  in  other  ways 
it  is  growing  and  must  grow  rapidly.  The  spirit  of  civic  im- 
provement spreads.  The  streets  are  better  paved  than  for- 
merly; there  are  more  public  buildings,  art  galleries,  and 
noble  monuments.  Every  cross-road  in  the  land  will  some 
day  have  its  fountain  and  its  statue.  The  cooperation  of  the 
whole  community  gives  to  collective  use  many  of  the  advan- 
tages of  large  production,  and  the  maximum  of  enjoyment. 

5.  Distribution  may  be  by  status  or  set  rules  and  cus-  Distribution 
toms.     Distribution  by  status  fixes  the  shares  of  men  inde-  J^status 
pendently  of  their  effort  and  without  their  controj.     It  is 
guided  neither  by  their  personal  merit  nor  by  the  economic 

value  of  their  services,,  but  by  the  merits  and  acts  of  men 
not  living.  This  method  has  prevailed  and  still  prevails  to  a 
great  extent,  though  in  our  society  this  is  hardly  realized. 
Feudal  society  was  built  on  status..  Men  were  born  to  cer- 
tain privileges  and  positions;  they  inherited  property  which 
could  neither  be  bought  nor  sold ;  they  followed  trades  which 
could  rarely  be  entered  by  any  outside  of  favored  families. 
Caste  in  India  and  in  other  Oriental  countries  regulates  by 
status  a  large  part  of  the  life.  In  western  countries  to-day 
inheritance  of  property  is  the  main  legal  form  of  status  and 
it  shades  off  into  other  forms  of  distribution.  While  in  some 
cases  inheritance  may  be  looked  upon  as  a  gift  to  the  heir, 
in  other  cases,  elsewhere  noted,  it  is  partly  earned  by  the  heir 
who  has  helped  to  produce  it.  By  public  opinion  and  by 
prejudices,  status  is  still  maintained  even  where  the  law  has 
formally  abolished  it,  as  is  seen  in  modern  race  problems. 

6.  Distribution  is  usually  competitive  in  accordance  with   competitive 
the  value  of  the  product.     This  is  the  dominant  form  of  Distribution 

the  domi- 

distribution  in  modern  society.    It  is  the  essentially  economic   nant  form 
form,  as  contrasted  with  the  legal  and  personal  forms  just 
described,    because    it    is    impersonal    and    reducible    to    a 
rule  of  value,   j  Distribution  under  competition  is  made  notj 


410 


DISTRIBUTION  OP   THE   SOCIAL  INCOME 


[CH.  42 


with  reference  to  abstract  ethical  principles  or  to  personal 
affection,  but  to  tl^e  value  of  the  product  so  far  as  it  is 
honestly  controlled^  Monopoly,  it  may  be  noted,  never  has 
ceased  to  rest  under  the  ban  of  Anglo-Saxon  law,  hence  to 
exemplify  compulsory,  as  opposed  to  competitive,  distribu- 
tion. JAstriking  feature  of  the  competitive  method  is  its 
decentralization.  Each  helps  to  value  the  economic  services 
of  eacly  If  one  pays  more  for  the  services  of  the  singer  than 
for  those  of  the  cook,  it  is  not  because  he  would  rather  listen 
to  the  singing  than  to  eat,  but  because  by  apportioning  his 
income  he  can  get  the  singing  and  the  eating  too.  In  the 
existing  circumstances,  the  singer's  services  seem*  to  him 
worth  paying  for,  and  he  backs  his  opinion  with  his  money, 
each  is  measuring  the  services  of  all  others,  and  all  are 
valuing  each.  It  is  the  democracy  of  valuation,  while  the 
method  of  authority  is  an  oligarchy  or  monarchyA 

7.  The  best  distribution  in  practice  must  ve  sought  in 
union  and  harmony  of  these  various  methods.  Various  social 
reforms  propose  simply  the  extreme  application  of  one  kind 
to  the  exclusion  of  the  others.  There  are  two  opposing  views 
of  competition :  one,  that  it  is  the  ideal  to  be  sought ;  the 
other,  that  it  is  inherently  bad,  and  therefore  should  be  abol- 
ished. Extreme  individualists,  believing  that  everything 
would  be  settled  for  the  best  by  free  competition,  wish  to 
make  it  universal.  They  ignore  the  many  cases  where  it  does 
not,  should  not,  and  cannot  exist. 

Socialists,  ill  content  with  the  share  secured  by  the  less 
skilled  laborer,  say  that  the  competitive  plan  is  unsound  at 
the  core.  They  say  that  distribution  should  be  not  in  pro- 
portion to  value,  but  in  proportion  either  to  needs  or  to  de- 
serts (they  are  not  agreed  which),  judged  by  a  vague  ethical 
standard.  But  this  involves  the  principle  of  authority  in  its 
extremest  form.  It  intrusts  to  some  men  the  function  of 
passing  upon  the  economic  merits  or  desires  of  all  others. 
Yet  that  alone  is  not  a  conclusive  argument  against  all  use 
of  authoritative  distribution.  In  many  practical  cases  the 


&HJ  METHODS  OF  PERSONAL  DISTRIBUTION  411 

intrusting  of  power  and  authority  to  men  to  judge  of  the 
value  of  others  cannot  be  avoided.  Whatever  is  indispen- 
sable, whatever  is  the  best  possible,  is,  humanly  speaking, 
just.  Assessors,  judges,  jurors,  must  be  employed.  Inter- 
state commerce  commissioners  determine  whether  rates 
are  reasonable,  boards  of  arbitration  settle  disputes,  the 
strike  commission  adjudicates  difficulties  in  the  coal  regions. 
Doubtless  these  methods  will  be  increasingly  used. 

There  is  no  other  kind  of  distribution  than  those  enume-    Need  of  a 
rated.     The  strongest  contrast   is  between  the  competitive   ^isej)lend~ 
and  the  authoritative  principles;  the  others  are  minor  and   methods 
modifying.      None   of   them    alone    is    sufficient;    each    has 
its  merits  and  each  has  its  defects;  they  must  supplement 
each  other.     Actually  they  are  employed  in  modern  society 
side  by  side;  each  seems  essential  and  best  in  some  special 
application.    But  it  does  not  follow  that  exactly  the  proper 
use  is  now  made  of  each.    No  two  generations  have  followed 
the  same  rule,  and  the  proportions  in  which  use  has  been 
made  of  them  has  constantly  shifted.    It  must  be  recognized 
that  the  principle   of   diminishing   utility   applies  to   each 
method  of  distribution  as  it  does  to  the  productive  processes. 
Each  may  be   best  under   certain   conditions   and   circum- 
stances, but,  extended  in  application,  each  reveals  its  weak- 
nesses.    In  any  productive  process  the  best  method  depends 
upon  the  proper  proportion  and  combination  of  elements.    \  , 
Progress  toward  the  best  possible  distribution  is  to  be  sought     I* 
in  the  wise  adjustment  of  the  various  methods  to  human     I 
nature  and  to  human  needs. 


CHAPTER  43 
„        SURVEY    OF    THE    THEORY    OF    VALUE 

§  I.       REVIEW    OP    THE    PLAN    FOLLOWED 

The  cycle          1.     The  beginning  and  end  of  economic  study  is  man.    Be- 
1  fore  leaving  the  more  theoretical  and  abstracter  part  of  the 

study  theory  of  value,  it  may  be  well,  at  the  cost  of  some  repetition, 
to  restate  and  review  the  relations  of  the  various  parts  of 
the  argument.  Intent  jon  details  of  the  theory  of  value  the 
student  is  in  danger  of  losing  its  broader  perspective. 

The  proposition  with  which  this  section  opens  was  accepted 
as  our  axiomatic  starting-point.  It  was  not  so  in  the  older 
political  economy;  men  too  often  were  looked  upon  rather 
as  a  means  to  an  end,  namely,  the  creation  of  wealth.  This 
proposition  refers  to  all  classes,  not  to  a  small  group  of 
men.  The  aim  of  economic  study  is  democratic,  being  the 
welfare  of  all  men.  Economics  does  not  purpose,  however, 
to  explain  man's  action  with  reference  to  all  things.  It  asks 
and  attempts  to  answer  the  question :  *  *  Why  does  man  at- 
tach value  to  certain  things  and  actions;  why  does  he 
measure  them  in  certain  ratios  as  expressed  in  terms  of  each 
other ;  and  why  do  these  ratios  change  with  changing  condi- 
tions ? ' '  This  purpose  has  determined  the  order  of  our  study. 
Beginning  with  an  analysis  of  the  nature  of  wants,  and  of  the 
mental  process  of  valuing  consumption  goods,  the  circle  of 
inquiry  widened  to  the  problem  of  valuing  things  whose 
relation  to  wants  is  more  remote  and  indirect  (though  not  less 
important). 

The  problem  of  future  uses,  the  major  part  of  the  theory 

412 


$1]  REVIEW  OF  THE  PLAN  FOLLOWED  413 

of  value,  leads  back  to  the  question  of  the  use  man  makes  of 
things— a  field  claimed  by  the  moralist,  but  one  that  cannot 
be  neglected  by  the  economist.  Economics  is  not  the  whole 
science  of  social  relations.  It  is  a  restricted  part  of  the 
field.  But  it  comes  into  relation  with  great  practical  ques- 
tions that  touch  all  sides  of  life.  Thus  economics  broadens 
and  unites  with  the  general  stream  of  sociology.  In  the  pur- 
suit of  our  study  one  comes  back  to  the  starting-point  and 
cause  of  value— human  wants  and  the  use_  made  of  wealth  to 
gratify  them.  The  circle  is  completed.  We  have  surveyed, 
rapidly  and  imperfectly  it  is  true,  the  whole  range  of 
economic  inquiry. 

2.  The  central  point  in  economic  study  is  the  simplest  Theunitin 
problem  of  exchange  value.     The  first  look  at  the  economic   value 

problems 

world  reveals  so  many  things  that  have  relation  to  wants, 
and  relations  so  complex,  that  the  mind  is  confused.  The 
object  of  science  is  to  simplify ;  it  seeks  unity  in  the  midst  of 
chaos.  Relations  exist  between  wants  and  things  that  cer- 
tainly never  can  gratify  them  directly.  Where  is  the  simplest 
aspect  of  the  problem  to  be  found?  Evidently  in  the  ex- 
change of  consumption  goods,  for  these  are  in  closest  touch 
with  wants.  Out  of  the  complex  of  direct  and  indirect  goods, 
those  few  which  are  at  the  moment  gratifying  wants  must  be 
somewhat  abstractly,  but  logically,  set  apart  and  studied. 
In  the  simplest  problem,  the  exchange  of  the  most  typical 
consumption  goods,  is  the  key  to  the  larger  problem  of  value. 
If  one  could  follow  it  step  by  step  into  its  complexer  rela-l 
tions,  he  might  hope  to  understand  everything  in  economicsJ 

3.  The  problems  of  rent  and  of  time-value  are  successive   Former  or 
steps  in  the  explanation  of  the  exchange  value  of  indirect  ™™™^n_ 
agents.    The  term  rent  has  been  so  variously  defined  that  no  ceptions  of 
caution  to  the  student  as  to  its  use  can  be  deemed  superfluous.   ™£rll* 
Until  recently  economists  sought  to  confine  the  term  to  the 
income  from  natural  resources   (or  land).     Rent,  in  their 
conception,  was  the  income  from  one  group  of  goods,  physi- 
cally distinguishable  from  another  group  of  goods,  called 


414  SURVEY   OF   THE   THEORY  OF   VALUE  [CH.  43 

capital,  which  were  supposed  to  yield  interest.  That  is,  rent 
and  interest  was  each  supposed  to  bear  much  the  same  rela- 
tion to  a  particular  set  of  durable  agents;  the  difference 
between  them  was  primarily  inJthe  ag£nt  that  yielded  them 
(though  there  were  other  complicating  thoughts)  rather 
than  in  the  aspect  of  value  they  represented. 

Rent  and  Kent  as  defined   in  this  volume  has  the  much  broader 

meaning  of  tne  usufruct  of  any  material  agent  as  contrasted 
with  the  use-bearer.  Usufruct  is  a  conception  most  intimately 
related  to  that  of  consumption  goods,  but  is  logically  one  step 
further  removed  from  want.  Time^value,  as  here  considered, 
is  a  broader  conception  than  that  of  contract  interest,  for  it 
has  to  do  with  the  all-pervading  element  of  time  in  its  in- 
fluence on  value.  Some  rents  are  logically,  and  in  practical 
business  as  well,  not  measured  over  periods  of  time,  but  at  the 
moment  of  their  accrual.  The  measurement  of  time  differ- 
ences is  mainly  required  in  setting  a  valuation  upon  a  more 
or  less  permanent  use-bearer.  This  process,  which  is  capital- 
ization, has  only  recently  been  recognized  to  be  the  discount- 
ing of  all  the  future  uses  to  their  present  worth.  While  in  its 
essence  this  is  merely  a  problem  in  exchange  value,  it  is  the 
highest,  subtlest,  and  most'  difficult  of  such  problems.  Its 
understanding  presupposes  rent,  just  as  rent  presupposes  the 
analysis  of  wants  and  marginal  utility.  It  is  the  outer  zone 
of  the  value  problem,  carrying  the  thought  of  value  years 
away  (all  but  an  eternity  away)  from  present  enjoyment. 
Different  While  both  rent  and  time  value  are  widened  so  that  each 

value8 "  applies  in  some  manner  to  all  durable  agents,  it  is  a  grave  er- 
rorjuo  conclude  hastily  that  the  intention  is  to  make  synony- 
mous the  old  terms  rent  and  interest.  Rent  and  time-discount 
remain  'essentially  different  stages  in  the  value  problem.  Ac- 
tual concrete  net  economic  incomes  as  they  arise  are  always 
rents.  Interest  never  accrues  in  a  concrete  form  except  under 
the  interest  contract  for  a  money  loan  (a  contract  income, 
not  an  economic  income),  and  this  evidently  is  a  species  of 
contract  rent.  Time-value  is  a  phase  of  value  connected 


&II]  VALUE   THEORIES  AND   SOCIAL   REFORMS  415 

logically  with  investment,  or  the  calculation  of  future  earn- 
ing power;  rents  are  both  actual  and  expectative,  or  future, 
but  as  realized  incomes  they  always  express  present  earning 
power.  Together,  rent  and  capitalization  embrace  the  whole 
problem  of  valuing  durable  material  agents.  */ 

4.  Wages  and  profits  are  of  the  same  genus,  the  value  of  wages  and 
human  services  of  different  grades.  The  attempt  has  been 
made  in  the  foregoing  treatment  to  show  the  unity  between 
the  problems  of  wages  and  profits,  and  to  point  out  the 
difference  between  the  conditions  that  surround  them. 
Through  the  common  characteristic,  social  utility,  the  em- 
ployer's service  can  be  compared  with  the  most  ordinary  or 
the  most  artistic  labor.  Profits  and  wages,  therefore,  are  sim- 
ply different  aspects  of  the  same  question.  A^  common  power, 
or  principle,  is  found  in  all  objects  of  value,  a  power  to 
gratify  human  wants.  In  the  variety  of  human  services 
and  in  material  goods  must  be  sought  this  unity. 

The  different  kinds  of  services  range  from  direct  to  most 
indirect  goods.  The  commonest  labor  may  serve  welfare  at 
the  moment  or  may  be  embodied  in  a  form  to  be  used  years 
later.  In  that  light,  wages  seems  a  more  complex  problem 
than  either  rent  or  capitalization.  But  the  moment  the  ser-- 
vice  embodies  itself  in  a  material  good  with  future  uses  the 
general  theory  of  capitalization  applies  to  it. 

§  II.      RELATION  OF  VALUE  THEORIES  TO  SOCIAL  REFORMS 

1.     The  earlier  theories  of  political  economy  implied  a  dis-   «ortho- 
mal  view  of  the  future  of  the  masses.  The  theory  of  value  one  d°*^cal 
holds  is  sure  to  affect  his  view  of  economic  progress  and  of  economy 
social  reform.    The  theories  from  the  middle  of  the  eighteenth 
to  the  middle  of  the  nineteenth  centuries,  however  varied 
they  were  in  other  respects,  nearly  all  gave  a  gloomy  view  of 
the  condition  of  the  laboring-men.     The  physiocratic  school 
in  France,  the  so-called  "  orthodox  "  economists  in  England 
(that  is,  the  writers  from  about  1800  to  1850  that  were  in 


416 


SURVEY  OF  THE  THEORY  OF  VALUE 


[CH.  43 


The  gloomy 

socialistic 

theory 


sympathy  with  the  landholding  or  commercial  classes),  and 
the  socialistic  or  laboring-class  theorists,  all  inclined  to  this 
view.  It  was  while  this  view  prevailed  that  Carlyle  char- 
acterized political  economy  by  the  term  still  sometimes  heard 

"the  disjna^science. ' '  The  thinkers  of  that  time  started 
their  study  of  value  at  wages,  and  assumed  that  population 
would  always  increase  so  fast  as  to  force  labor  to  a  bare 
subsistence.  The  other  shares  (or  the  other  classes  of  soci- 
ety) were  supposed  then  to  absorb  all  the  surplus  income. 
Economics  to-day  is  not  especially  lugubrious,  and  its  more 
cheerful  note  is  due  as  well  to  its  changed  theory  of  value  as 
to  the  evidence  of  advancing  welfare  among  the  masses. 

2.  The  socialistic  theory  of  value,  akin  to  the  other,  holds 
that  capitalists  absorb  all  the  benefits  of  progress.  The  so- 
cialists (of  the  radical  school)  claim  that  their  theory  is 
merely  the  logical  conclusion  to  be  drawn  from  the  old  "or- 
thodox" theory,  stated  in  its  extremest  form.  Usually, 
however,  the  orthodox  theorists  softened  and  modified  greatly 
the  statement  of  their  harsher  views.  The  socialists  have 
not  been  willing  to  recognize  any  ameliorating  conditions. 
They  say:  economic  theory  shows  that  under  a  competitive 
condition  of  society  the  laboring-man  must  be  forever  ground 
down  in  helpless  misery ;  therefore  the  ©nly  hope  of  the  labor- 
ing masses  is  to  do  away  with  competitive  society  and  to 
substitute  for  it  central,  governmental  control  of  all  industry. 
They  did  not  and  do  not  attempt  to  distinguish  carefully  the 
part  of  production,  due  to  brains  and  effort,  from  the  part 
due  to  ownership  of  capital.  The  socialist  theory  is  a  plan 
for  political  agitation  rather  than  a  scientific  theory  of 
value.  It  was  originated  or  elaborated  by  men  such  as 
Karl  Marx,  Frederick  Engels,  and  Ferdinand  Lasalle,  as 
labor  leaders  and  political  agitators,  who  found  a  ready 
weapon  in  the  bungling  economic  analysis  of  the  time.  The 
claim  of  a  scientific  basis  for  socialism  has  continued  to  be 
proudly  made  by  their  followers,  but  it  has  a  tottering  sup- 
port in  their  defective  theory  of  value. 


$11]  VALUE  THEORIES   AND   SOCIAL   REFORMS  417 

3.  The  single-tax   theory  of  value  is  that  ground-rent  George's 
automatically  absorbs  all  benefits  of  progress.     This  is  the  JjJJJj^'1*' 
most  notable  example  of  a  plan  of  social  reform  growing  out 

of  an  abstract  theory  of  value.  While  the  socialists  first  had 
their  plan  of  social  reform  (or  revolution),  in  whose  support 
Marx 's  fanciful  theory  of  value  was  invented,  Henry  George 
appears  first  to  have  got  hold  of  a  theory  of  value  that 
suggested  his  plan  of  social  reform.  Studying  the  political 
economy  of  Ricardo  and  Mill,  he  accepted  their  ideas  regard- 
ing the  hopeless  outlook  of  the  laboring  classes,  and  their 
conception  of  the  theory  of  ground-rent  with  its  false  im- 
plication that  land-owners  get  all  the  surplus  in  society. 
George  thus  came  to  believe  that,  with  private  ownership  in 
land,  competition  steadily  robbed  all  but  landlords,  even  the 
non-1  andhol ding  capitalist,  of  any  share  in  the  benefits  of 
progress.  This  theory  of  value  is  thought  to  explain  all  the 
poverty  in  the  world.  It  calls,  in  the  single-taxer 's  opinion, 
for  a  radical  measure  of  reform,  namely,  the  taking  of  all 
rent  of  land  for  public  purposes  as  a  common  instead  of  an 
individual  income.  If  the  theory  of  value  on  which  it  is 
based  were  sound,  the  doctrine  would  have  irresistible  reasons 
in  its  favor;  if  it  is  false,  most  of  the  argument  falls  to  the 
ground,  though  there  may  still  be  substantial  reasons  of  a 
different  nature  for  the  exceptional  treatment  of  ground- 
rents  for  purposes  of  taxation. 

4.  Recent  theories  of  value  assign  to  labor  a  more  hopeful  Recent 
position.     A  most  optimistic  theory  of  wages  is  '  *  the  residual  JJJ^  of 
claimant  theory,"  presented  by  Francis  A.  Walker.      His  wages; 
view  was  that  the  various  shares  of  production,  such  as  land-  WaU 
rent,  the  income  from  machinery,  etc.,  and  the  enterpriser's 
profits,  were  fixed  by  forces  independent  of  wages,  and  any 
increase  in  the  product  must  therefore  fall  to  the  laborer  as 

the  residual  claimant.  This  conclusion  has  the  one  merit 
of  explaining  somehow  the  rise  in  wages  in  the  past  century, 
but  the  fallacy  of  its  method  is  too  evident  to  call  for  ex- 
posure. Not  to  enter  into  the  details  of  the  method,  it  is 

27 


418 


SURVEY  OF  THE  THEORY  OF  VALUE 


ICH.  43 


enough  to  note  that  it  involves  the  circular  reasoning  that 
land-rent  is  a  surplus  over  cost  of  production,  and  is  fixed 
regardless  of  wages,  whereas  the  cost  of  production  itself  is 
made  up  of  money  wages, 
ciark's  Another  American  economist,  John  B.  Clark,  is  led  by  his 

theory  of  profits  to  a  most  hopeful  conclusion  as  to  the  future 
of  wages.  Profits  he  considers  to  be  essentially  the  reward 
for  improvements  in  productive  processes,  which  gradually 
accrue  to  the  general  benefit.  As  profits  thus  disappear,  the 
average  wage-earner  is  correspondingly  uplifted,  a  conclu- 
sion quite  as  hopeful  as  that  of  Walker.  In  discussing  profits 
above,  dissent  from  the  narrow  conception  of  their  source  has 
been  expressed. 

Some  facfs  lend  support  to  every  one  of  these  theories  of 
social  progress,  but  other  facts  refuse  to  be  harmonized.  The 
temptation  to  get  a  simple,  dogmatic  explanation  of  value 
should  be  resisted.  When  the  interrelation  of  the  factors  is 
recognized  there  is  little  likelihood  of  concluding  that  some 
one  of  them  v/ill  absorb  all  the  benefits  of  progress.  One  is 
not  driven  to  the  extreme  either  of  optimism  or  of  pessimism. 
While  the  theory  of  value  is  not  in  itself  a  theory  of  society, 
it  greatly  influences  social  conclusions.  Clear  economic  anal- 
ysis is  a  condition  to  sound  thinking  on  practical  questions. 


§  HI.      INTERRELATION  OF  ECONOMIC  AGENTS 

organic       I     1.     The  industrial  process  is  a  unity  and  the  different 
thiTroduc-  \a9en^s  ^ear  an  organic  relation  to  each  other.  (The  problem 
tive process    of  value  is  not  one  of  physical  division;  it  is  one  of  logical^ 
analysis,  and  this  is  not  possible  in  isolation  or  without  the 
competition  of  men}  Production  as  now  carried  on  is  a  social 
process ;  the  determination  of  market  price  is  a  social  process. 
The  different  agents  are  complementary  goods,  each  neces- 
sary to  the  best  use  of  the  various  other  agents.    The  value 
of  seed  is  not  to  be  found  apart  from  the  use  of  the  ground ; 
or  the  value  of  the  leather  apart  from  the  shoemaker  or  the 


INTERRELATION  OF  ECONOMIC  AGENTS  419 

thread  he  uses.  When  these  things  are  brought  together  in 
society  their  value  is  found  by  the  comparison  and  measure- 
ment of  marginal  utilities.  Economic  forces,  like  other  classes 
of  forces,  act  and  react  upon  each  other.  Two  bodies  attract 
each  other  in  space;  two  chemicals  uniting  are  both  trans- 
formed into  a  substance  differing  from  either.  The  economic 
result  of  materials  and  men  cooperating  is  something  differ- 
ing from  either  factor,  yet  dependent  on  both. 

2.     The  divisions  of  the  older  political  economy  are  aspects  Thecon- 
of  the  general  problem  of  value.    The  divisions  conventional   ventional 

divisions  of 

in  the  text-books  on  political  economy,  namely,     production,   economics 
exchange,  distribution,  and  consumption,  '  have  not  been  ob- 
served in  the  plan  of  this  work.    It  has  not  seemed  possible,; 
to  accept  the  view  that  each  of  these  phases  of  the  vital 
economic  process  could  be  discussed  completely  apart  from 
the  others.    Consumption  must  be  studied  at  the  beginning]    ^ 
as  the  basis  of  exchange  value,  and  again  at  the  end,  when  the 
circle  of  thought  has  returned  to  the  use  man  makes  of 
wealth ;  and  it  pervades  the  whole  subject  of  value,  for  back 

of  every  price  is  the  potential  utility  of  the  good.    Exchange     i „ 

is  coextensive  with  the  whole  process  of  associated  industry ; 
for  wherever  there  is  a  price,  there  is  exchange.  Subjective 
value  outside  a  market  forms  a  small,  though  not  negligible, 
part  of  the  problem  for  the  student  of  to-day.  Production 
is  implied  in  every  exchange,  as  exchange  is  in  all  social  pro- 
duction. They  are,  indeed,  but  different  phases  of  the  larger 
phenomenon,  the  economic  process.  Nor  is  distribution,  con- 
sidered in  its  impersonal  or  economic  form,  any  other  than 
the  logical  valuing  of  the  shares  of  the~  factors  in  economic 
production.  Impersonal  distribution  is  coextensive  with  eco- 
nomic production.  Whatever  a  good,  logically  considered, 
contributes  to  value  in  production,  that  is  its  share~~of  the 
product.  Personal  distribution,  it  is  true,  brings  in  other 
great  influences  which  have  been  partly  considered,  but  which 
will  be  treated  more  fully  in  the  division  to  follow,  on  the 
influence  of  the  state  in  the  distribution  of  income. 


420 


SURVEY  OF  THE  THEORY  OF  VALUE 


[CH.  43 


The  broad- 


Generality 


value 


Mutual 


factors 


I 


The  law  of  diminishing  returns  is  the  broadest  prin- 
°f  value.  The  one  character  common  to  all  goods  is 
that  their  importance  varies  with  their  quantity  in  any  given 
connection.  This  is  true  of  direct  goods  whose  power  to 
gratify  wants  falls  as  the  supply  grows  ;  it  is  true  of  indirect 
goods,  whose  technical  importance  diminishes  as  the  quantity 
increases,  and  which  when  taken  at  any  given  cost  can  be 
applied,  after  a  point,  only  with  diminishing  advantage.  The 
gradual  extension  of  the  marginal  principle  from  land  used 
in  agriculture  to  every  conceivable  economic  agent  is  the 
most  important  development  of  the  last  century  of  economic 
theory. 

It  being  true  that  things  are  measured  by  the  utility  of  the 
un^  use^  1^'  logically  considered,  the  least  change  in  the 
combination  alters  the  value  of  all  the  factors.  Practical 
economic  problems,  therefore,  are  dynamic,  not  static.  The 
view  that  the  shares  of  the  different  factors  are  fixed  by 
quite  separate  laws  has  not  been  accepted  here.  The  law  of 
rent  is  the  same  as  the  law  of  wages  in  its  essential  point 
and  principle.  It  is  a  general  law  of  value  applied  to  a  par- 
ticular kind  of  want-gratifier.  The  law  of  substitution  like- 
wise  is  a  general  law,  for  within  limits  some  substitution  of 
factors  is  always  possible  along  the  margin.  That  being 
true,  every  movement  of  price  creates  its  own  resistance  ;  sub- 
stitutes will  be  found  for  materials,  demand  will  decline,  and 
a  new  equilibrium  of  price  will  be  attained. 

4.  The  factors  and  agents  of  production  mutually  fur- 
n^1  ^e  field  °f  employment  for  each  other.  Each  factor 
is  dependent  for  its  technical  efficiency  on  the  presence  of  the 
other  factors.  If  labor  is  plentiful  and  machines  are  scarce, 
machines  bear  a  high  rent.  In  accordance  with  the  law  of 
diminishing  returns,  the  last  unit  of  labor  in  that  case  con- 
tributes little  to  the  product,  and  labor  gets  low  wages,  while 
more  is  attributed  to  the  machine.  Each  machine  thus  may 
be  considered  to  offer  a  field  for  the  employment  of  labor. 
If  population  increases  and  land  remains  fixed,  the  need  for 


INTERRELATION  OF  ECONOMIC  AGENTS  421 

food  raises  the  rental  value  of  land.    But  if  population  in- 
creases slowly,  and  capital  and  science  progress,  the  field  for 
the  employment  of  labor  is  enlarged;  and  if  new  lands  are  An  ever 
opened  up  or  new  resources  are  discovered  beneath  the  sur-  c^iem 
face  of  the  land,  the  field  for  labor  is  still  more  enlarged 
and  a  greater  share  is  attributed  to  labor.     This  changing 
character  of  the  problem  must  be  recognized;  no  share  is 
foreordained  in  size. 

The  pursuit  of  the  analysis  of  value  along  the  lines  of 
marginal  utility  thus  leads  to  conclusions  far  less  mechanical, 
and,  to  the  superficial  student,  less  simple  than  were  the 
the  doctrines  prevailing  in  the  older  economics.  But  the 
conclusions  are,  let  us  hope,  more  exact  and  more  applicable 
to  the  real  world,  enabling  the  student  to  arrive  at  juster 
views  of  the  present  interests  and  of  the  future  welfare  of 
society. 


DIVISION  B-RELATION  OF  THE  STATE 
TO  INDUSTRY 

CHAPTER  44 
FREE  COMPETITION  AND  STATE  ACTION 


Definition 
of  economic 
freedom 


§  I.      COMPETITION   AND    CUSTOM 

/  1.  Economic  freedom  exists  when  men's  goods  or  their 
own  services  may  be  exchanged  as  they  choose,  without  hin- 
drance. Competition  is  but  another  expression  for  economic 
/freedom.  Where  men  are  free  to  exchange  their  goods  and 
/to  get  the  best  price  they  can,  and  actually  do  so,  they  are 
said  to  compete.  The  action  of  men  in  the  mass  follows 
pretty  regular  lines,  corresponding  to  certain  abiding  mo- 
tives. If  one  man  dictated  all  industry,  a  very  fragmentary 
science  of  economics  would  be  possible ;  but  the  mass  of  men 
act  according  to  some  rule  and  are  free  so  to  act.  When  men 
are  free  to  bring  their  goods  to  a  market  and  get  the  best 
price  possible,  a  single  market  price  results. 

WThen  cost  of  production  was  believed  to  be  the  regulator 
of  value,  it  was  said  that  the  law  of  value  laid  down  was 
true  ''within  the  limit  of  free  competition."  Market  price 
varied  ceaselessly  from  cost  of  production,  and  whenever  it 
did  "the  law  of  value"  as  then  formulated  was  admittedly 
invalid  or  inapplicable.  The  law  of  monopoly  price  was  sup- 
posed to  be  in  marked  contrast  to  the  law  of  competitive 
prices.  The  law  of  prices,  as  followed  in  our  study,  stated  in 

422 


§1]  COMPETITION   AND  CUSTOM  423 

terms  of  marginal  utility,  is  equally  valid  in  competitive 
and  in  monopol^tic  conditions  if  there  is  merely  one-sided, 
or  buyers',  competition.  Two-sided  competition  is  not  the 
sole,  though  it  is  the  usual  condition,  which  the  economist 
takes  account  of  in  reasoning  on  the  problem  of  price.  Any- 
thing that  keeps  men  from  exchanging  what  they  have  for 
the  best  price,  interferes  with  competition.  Some  of  these 
hindrances  have  been  noted,  others  are  now  to  be. 

2.     Economic  freedom  does  not  mean  equality  of  power  or/economic 
of  efficiency.     It  was  said  in  discussing  monopoly  that  it  equity o7 
was  not  to  be  understood  to  be  merely  either  scarcity  or  su-   efficiency 
periority.    To  speak  of  the  class  of  laborers  of  ability  above 
that  of  the  average  day  laborer  as  having  a  monopoly  is 
certainly  a  coiifusion  of  monopoly  with  the  scarcity  of  effi- 
ciency.   The  term  competition  is  not  easy  to  define  in  prac-  j 
tice;  for  it  is  not  easy  to  see  just  what  part  of  a  man's 
inability  to  exchange  is  due  to  his  own  lack  of  efficiency,  and 
what  to  things  outside  of  himself  which  prevent  him  from 
exchanging  his  labor.     But  the  thought  is  clear  that  free| 
competition— economic   freedom— is   limited  whenever  men! 
are  hindered  by  any  power  outside  themselves  from  using! 
their  economic  power  as  they  prefer.    The  limitations  of  com- 
petition, thus  understood,  are  essentially  social  limitations, 
imposed  by  other  men  either  unconsciously  by  custom,  con- 
vention, tradition,  or  consciously  by  force  or  by  laws.    When, 
among  Polynesian  tribes,  the  custom  of  taboo  prevailed,  by 
which  certain  things  were  reserved  to  the  rulers  and  were 
forbidden  to  the  common  man,  there  was  a  limitation  on  his 
economic  freedom.     Contrast  such  limits  with  those  set  by 
the  penury  of  nature.    The  savage  may  like  best  to  hunt,  but 
if  there  is  no  game,  he  must  fish;  he  may  like  best  to  make 
arrowheads,  but  in  need  of  food  he  must  dig  roots.     Eco- 
nomic action  is  limited  by  lack  of  knowledge  and  skill;  the 
resources  of  nature  lie  unused  under  the  feet  of  savages 
who  are  suffering  from  their  lack.     These  are  limitations 
not  of  economic  freedom  but  of  economic  efficiency. 


424 


FREE  COMPETITION  AND   STATE  ACTION 


[CH.  44 


3.  In  early  society  custom  limits  economic  freedom  in 
many  ways.     The  savage  is  not  a  man  without  law;  he  is 
bound  in  many  ways  to  prescribed  lines  of  conduct.    Primi- 
tive custom  usually  takes  on  a  religious  sanction,  and  every 
member  of  the  tribe  is  compelled  to  do  as  his  fathers  have 
done  and  as  his  neighbors  are  doing.     He  is  not  free  to 
choose.     Custom  in  some  ways  is  favorable  to  the  welfare 
of  society,  for  it  limits  the  power  of  masters  and  rulers, 
preserves  the   rights  of   individuals   to   common   property, 
and  is  in  the  interest  of  the  weak  as  well  as  of  the  strong.    In 
an  age  of  force  if  it  were  not  for  custom,  he  who  had  might 
on  his  side  could  take  all.    So  in  early  society  even  economic 
relations  were  complex  and  yet  almost  fixed— changing  only 
slowly   from  generation  to  generation.     Every  such  social 
custom  that  limits  the  choice  of  men  limits  economic  freedom. 

4.  Custom  ruled  a  large  share  of  the  industrial  life  of  the 
Middle  Ages.      Political   and   economic  interests  were   not 
clearly  divided  in  the  Middle  Ages.    Land  was  the  all-impor- 
tant kind  of  wealth.    Military  and  other  public  services  were 
performed  by  the  vassal,  who  thus  at  the  same  time  paid 
his  taxes  and  the  rent  of  the  land.    The  landlord  was  at  once 
the  ruler,  the  receiver  of  rents,  and  the  collector  of  taxes. 
The  rent,  however,  was  not  a  competitive  price,  but  consisted 
of  the  dues  and  services  the  forefathers  had  been  accustomed 
to  pay.     This  limited  slavery,  like  all  other  slavery,  was 
wasteful,  as  it  did  not  give  to  the  individual  the  strongest 
motive  to  increase  the  quantity  and  to  improve  the  quality 
of  his  service.    Trade  became  limited  in  almost  every  direc- 
tion.    Crafts  and  gilds  arrogated  to  themselves  the  right  of 
employment  in  their  industries.    No  matter  what  talent  the 
son  of  a  peasant  might  show,  he  usually  found  it  impossible 
and  always  found  it  difficult  to  follow  the  occupation  of  his 
choice.     Privilege  pervaded  all  the  life  of  that  time.     In 
such  conditions  economic  friction  is  great.     Men  are  kept 
in  trades  below  their  ability,  while  others  gain  command  of 
monopolistic  and  unearned  returns. 


$HJ          ECONOMIC  HARMONY  THROUGH  COMPETITION       425 

Yet  through  all  the  Middle  Ages  ran  the  forces  of  compe- 
tition. The  inefficiency  of  customary  services  was  a  constant 
invitation  to  competitors.  Men  were  striving  to  break  over 
the  barriers  of  custom  and  prejudice.  The  strife  for  freedom 
was  the  vital  economic  force  even  of  the  Middle  Ages.  The 
industrial  history  of  that  time  is  largely  the  story  of  the 
struggle  of  the  forces  of  competition  against  the  bounds  of 
custom. 


§  II.      ECONOMIC    HARMONY   THROUGH   COMPETITION 

1.  The    industrial    events    following    the    discovery    of  Effect  of 
America  strengthened  the  forces  making  for  economic  free-  m^eegmn 
dom.     Discoveries  in  the  Western  hemisphere  opened  up  a  custom 
wide  field  for  the  adventure  and  enterprise  of  Europe.    Com- 
merce is  the  strongest  enemy  of  custom,  and  new  opportuni- 
ties gave  a  rude  shock  to  the  conservatism  both  of  the  manor 

and  of  the  village.  With  the  rapid  growth  of  industry 
and  manufactures,  old  methods  broke  down.  In  an  open 
market  custom  declines ;  it  nourishes  best  in  sheltered  places. 
Further,  the  movement  of  thought  in  the  Reformation  and 
the  spirit  of  the  time,  expressing  the  principle  of  personal 
liberty,  allowing  the  individual  to  follow  his  own  opinions 
and  take  the  consequences,  were  favorable  to  competition. 
Despite  these  facts  the  restraints  of  the  national  governments 
on  trade  continued  great,  in  some  respects  increasing  during 
the  seventeenth  and  eighteenth  centuries,  in  France,  Holland, 
and  England.  The  regulation  before  attempted  by  towns 
and  villages  was  employed  on  a  larger  scale  by  national 
governments  with  their  commercial  systems.  The  colonies  in 
America  were  used  for  the  economic  ends  of  the  ll  mother 
countries"  and  for  the  selfish  interests  of  the  home  mer- 
chants in  Europe.  The  American  Revolution  was  one  of  the 
bitter  fruits  of  the  English  policy  of  trade  restriction. 

2.  Adam  Smith's  work  advocating  greater  economic  free-  Adam 
dom  had  a  profound  influence  upon  public  thought.    "The  ^SJ^ 


426  FREE  COMPETITION  AND  STATE  ACTION          [CH.  44 

Wealth  of  Nations,"  the  first  great  work  on  political  econ- 
omy, was  published  in  the  year  1776.  That  was  the  "  psy- 
chological moment,"  as  public  thought  was  so  prepared  for 
it  that  it  had  its  maximum  possible  influence.  The  year  of 
the  American  Declaration  of  Independence  gave  the  most 
striking  object  lesson  on  the  evils  of  a  selfish  colonial  policy 
that  interfered  on  a  grand  scale  with  economic  freedom. 
The  old  customs  had  become  ill  fitted  to  life,  ill  adapted  to 
the  rapid  industrial  changes  that  were  going  on.  What  was 
needed  in  many  directions,  both  in  politics  and  in  industry, 
was  negative  action  by  the  government,  the  repeal  of  the  old 
laws,  the  overthrow  of  old  abuses.  The  French  Revolution, 
following  a  few  years  later,  emphasized  this  thought  in  the 
Thephiioso-  political  field.  The  philosophers  of  the  time  believed  in  a 
phyof  "natural  law"  in  industry  and  politics.  The  reformers  of 
the  time  wished  to  throw  off  the  trammels  of  the  past  and  to 
give  men  opportunity  to  exert  themselves  "naturally."  In 
America  the  old  abuses  never  had  taken  deep  root,  as  the 
conditions  of  a  new  continent  were  not  favorable  to  monopoly 
and  privilege.  Although  the  movement  for  the  repeal  of 
medieval  laws  has  continued  in  Europe  from  1776  till  the 
present  time,  yet  to-day  custom  is  stronger  in  Europe  than 
in  America.  Serfdom  was  not  abolished  until  the  nineteenth 
century  in  Austria  and  southeastern  Europe,  and  not  until 
a  few  years  ago  in  Russia.  Many  economic  and  cultural 
forces  furthered  this  movement,  but  the  most  powerful  intel- 
lecfual  force  in  its  favor  was  the  work  of  Adam  Smith.  So 
strong  an  impression  did  Smith's  book  make,  that  in  the 
minds  of  men  "free  trade"  became  almost  identical  in 
thought  with  political  economy,  whereas  that  was  but  the 
temporary  economic  problem  of  the  eighteenth  century. 
Thedoctnne  3.  The  doctrine  of  the  "economic  harmonies"  is  the  ex- 
nomfc  e°°  trvme&t  form  of  belief  in  the  virtues  of  competition.  Every 
harmonies  truth  in  political  philosophy  finds  some  exaggerated  expres- 
sion. The  main  task  of  the  student  is  to  determine  what 
shade  of  gray  things  are,  rather  than  whether  they  are  white 


Good  social 
effects  of 


§HJ        ECONOMIC  HAEMONY   THROUGH  COMPETITION         427 

or  black.  The  belief  in  the  benefits  of  competition  and  the 
virtues  of  economic  freedom  found  expression  in  the  doc- 
trine of  "the  economic  harmonies."  This  is  the  faith  that 
if  men  are  left  entirely  free  to  do  as  their  interest  dictates, 
the  highest  and  best  efficiency  for  all  will  follow;  it  is  the 
belief  that  the  economic  interests  of  all  men  are  in  harmony. 
The  most  striking  evidence  in  support  of  this  thought  is  the 
stimulating  effect  of  self-interest  freely  working  in  the  field 
of  competition.  Each  strives  to  do  what  will  bring  him  the 
largest  return,  and  the  price  others  pay  measures  their  esti- 
mate of  the  service.  Each  seeking  his  own  interest  is  led  to 
make  himself  more  useful  to  others.  Thus  are  men  stimu- 
lated to  sacrifice,  to  invention,  to  preparation;  thus  is  zeal! 
animated  and  are  efforts  sustained. 

Through  self-interest  the  working  force  is  distributed  over 
the  field  of  industry  wherever  it  is  most  needed.  The  remark- 

self-mterest 

able  adjustment  of  industry  to  the  needs  of  each  neighbor- 
hood is  brought  about  by  individual  motives,  not  by 
centralized  authority.  It  is  not  mere  chance  that  produces 
this  harmony.  Wherever  consumers  settle,  stores  are  started 
and  factories  are  built.  Wherever  work  is  to  be  done,  men 
come  in  about  the  right  number  to  do  it.  Skill  is  adjusted 
to  needs  by  the  delicate  measurement  of  the  market  rate  of 
wages.  Competition  gives  a  definite  rule  of  price— certainly 
the  only  definite  impersonal  rule;  some  say  the  only  just 
rule.  The  competitive  price  must  be  appealed  to  even  in 
arbitration.  It  is  the  standard  to  which  things  tend  con- 
stantly to  adjust  themselves  in  an  open  market, 

4.  (^Experience  shows  that  the  economic  interests  of  men\  conflicting 
are  only  partly,  not  wholly,  in  harmony.)  That  there  is 
great  measure  of  truth  in  the  statements  just  made,  all  must  world 
admit;  but  their  application  is  limited.     They  are  partial 
truths,  never  to  be  ignored,  but  quite  false  if  taken,  without 
modification,  as  practical  rules  of  conduct.    There  are  three 
species  of  competition  in  every  market;  that  between  sellers, 
that  between  buyers,  and  that  between  sellers  on  the  one  hand 


428 


FREE  COMPETITION  AND   STATE  ACTION 


[CH.  44 


and  buyers  on  the  other.  It  is  to  the  interest  of  the  buyers 
that  the  sellers  shall  be  numerous,  eager,  and  freely  com- 
peting. It  is  to  the  interest  of  the  seller  that  supply  shall 
be  small,  that  sellers  shall  be  united,  a*nd  that  buyers  shall 
compete  sharply.  If  at  any  point  free  competition  is  hin- 
dered, even  the  disciple  of  economic  harmony  must  expect 
a  discordant  result.  But  in  reality  competition  is  rarely 
quite  complete  on  both  sides,  and  when  it  is  not,  the  weak 
suffer.  Men  do  not  start  with  fair  and  equal  opportunities. 
All  that  they  may  be  entitled  to  under  competition  may  be  so 
little  that  social  sympathy  seeks  to  better  the  result;  hence 
poor  relief,  public  and  private.  Society  as  a  whole  has  an 
interest  in  the  outcome  of  the  individual 's  economic  struggle. 
It  cannot  see  men  starving  or  driven  into  crime.  But  the 
argument  need  not  be  confined  to  such  crude  and  extreme 
cases,  for  wherever  economic  interests  are  not  in  harmony 
and  it  is  possible  to  further  the  social  welfare,  will  not 
society  be  justified  in  acting  ? 


Imperfec- 
tions of 
economic 
freedom 


§  III.      SOCIAL    LIMITING    OF    COMPETITION 

1.  Undoubted  evils  result  from  some  forms  of  competition 
under  the  conditions  actually  existing.  Complete  freedom 
must  remain  a  somewhat  abstract  ideal,  and  actual  conditions 
must  be  recognized.  Entire  freedom  of  choice  means  freedom 
to  make  mistakes,  a  privilege  whose  enjoyment  society  cannot 
always  permit.  The  child  should  be  raised  to  good  citizen- 
ship, and  entire  freedom  of  choice  makes  that  impossible  or 
improbable.  The  freedom  of  choice  of  the  insane,  the  feeble- 
minded, and  the  criminal,  cannot  be  recognized.  Even  where 
competition  is  the  ideal  of  sound  adult  humanity,  it  is  not 
to  be  too  suddenly  or  extremely  applied.  The  inequality  of 
faculties,  the  prevailing  dishonesty,  the  mass  of  inherited 
abuses,  cannot  be  either  ignored  or  at  once  ended.  The 
immigrant  from  Europe,  plunged  into  the  trying  conditions 
of  city  life,  suffers  in  health  and  in  morals,  and  often  be- 


§iii]  SOCIAL  LIMITING  OF  COMPETITION  429 

comes  a  burden  upon  society.  One  of  many  competitors  may 
drive  competition  to  an  evil  extreme.  The  "problem  of  the 
twentieth  man"  is  presented  when  nineteen  men  desire  to 
limit  competition  in  ways  not  socially  harmful,  as  by  closing 
shops  on  Sunday  or  in  the  evening,  and  the  one  man  refuses. 
The  appeal  to  economic  harmony  often  is  the  cry  of  "peace, 
peace,  where  there  is  no  peace."  The  highest  social  result 
may  be  attained  now  by  limiting,  again  by  directing,  in  other 
cases  possibly  by  fostering,  competition. 

2.  The  main  rivals  of  competition  are  custom,  religion,  Forces 
morality,  combination,  and  state  action.     The  first  three  of  competition 
these  were  the  strongest  forces  in  the  past  and  they  are  still .       ^/ 
operating;  but  combination  and  state  action  are  more  char- 
acteristic of  the  present.    The  influence  of  custom,  of  moral- 
ity, and  of  religion  on  value,  has  been  touched  upon  at  several 

points  in  our  study;  that  of  combination  has  been  recently 
and  more  fully  discussed.  But  state  action,  one  of  the  most 
important  of  all  the  limitations,  has  been  reserved  for  the 
concluding  portion  of  our  work. 

3.  It  is  a  function  of  the  state  to  determine  in  part  the   The  state '^ 
ways  in  which  men  shall  exert  their  powers.    This  is  not  the  JJJJjJJ^ 
sole  function  of  the  state,  nor  is  its  influence  toward  this  end  competition 
exclusive.     The  state  puts  limits  to  the  physical  rivalry  of 

men.  In  the  distant  past  no  doubt  physical  rivalry  between 
men  was  an  agent  of  progress.  The  strong  drove  out  the 
weak;  physical  contest  developed  more  vigorous  limbs,  keener 
senses,  and  higher  sagacity.  To-day  it  is  one  of  the  principal 
functions  of  the  state  to  suppress  the  physical  contest  be- 
tween men.  The  citizen  is  surrounded  with  a  network  of 
rules  and  regulations  of  which  he  is  hardly  conscious.  Most 
men  easily  avoid  coming  into  contact  with  the  police  and 
feel  no  irksomeness  in  the  control  of  the  civil  courts.  The 
state  regulates  economic  interests  in  many  other  ways;  it 
controls  the  building  of  streets ;  it  inspects  the  material  and 
construction  of  houses ;  it  forbids  acts  injurious  to  the  public 
welfare;  it  regulates  the  issue  of  money;  it  determines  the 


430  FREE   COMPETITION   AND   STATE  ACTION          [CH.  44 

manner  in  which  credit  may  be  extended,  the  forms  of 
taxation,  and  the  direction  which  trade  may  legally  take. 
The  state  has  a  part  in  shaping  great  industries  of  a  public 
or  semi-public  nature,  such  as  waterworks,  railroads,  and  the 
postal  system. 

iand  The  state  is  as  wise  as  the  men  who  constitute  it.     Men 

te  action  1  ms^Q  mistakes,  therefore  men  collectively  will  make  them. 
j  The  state  regulates  and  limits— now  wisely,  now  foolishly ; 
but  its  aim  is  to  preserve  the  benefits  of  competition  without 
^A  its  evils,  to  lift  the  competition  to  a  higher  plane,  and,  by  de- 
/^  \  termining  the  direction  in  which  men  shall  put  forth  their 
.  efforts,  to  give  a  higher  and  truer  economic  freedom. 


CHAPTER  45 
USE,  COINAGE,  AND  VALUE  OF  MONEY 

§  I.       THE    PRECIOUS     METALS    AS    MONEY 

1.    Money  we  have  defined  as  a  material  means  of  payment 

-,,.',,,  .          defined  and 

and  medium  of  exchange,  generally  accepted  and  passing  reviewed 
from  hand  to  hand.  The  origin  and  function  of  money  were 
set  forth  in  the  study  of  capital.  The  subject  must  now 
be  approached  from  a  different  side  and  with  the  two-fold 
purpose  of  seeing  whether  there  is  anything  peculiar  in  the 
relation  of  money  to  the  general  problem  of  value,  and  what 
is  the  influence  of  the  action  of  the  state  on  the  value  of 
money.  The  definition  of  money  implies  several  ideas. 
First,  the  words  "generally  accepted  means  of  payment" 
imply  that  money,  as  something  bearing  the  stamp  of  so- 
cial approval,  has  a  peculiar  social  character,  is  not  an 
ordinary  good.  Second,  the  definition  implies  that  money 
itself  must  be  a  thing  having  value,  otherwise  it  could  not 
serve  as  a  medium  of  exchange.  Exchange  means  the  taking 
and  giving  of  things  of  value.  Money  is,  therefore,  not 
merely  an  order  for  goods,  as  a  card  or  paper  requesting 
payment ;  it  is  itself  a  thing  of  value,  though  this  value  may 
be  due  solely  to  its  possessing  the  money  function.  This  point 
is  one  of  the  most  difficult  in  the  subject.  Third,  the  defi- 
nition implies  that  money  is  a  material  thing.  The  telegram 
When  transferring  an  order  for  the  payment  of  money,  the 
spoken  word,  the  promise  to  pay,  etc.,  are  not  money.  Fourth, 
hv  implies  that  money  passes  from  hand  to  hand,  is  a  thing 
that  can  be  handled,  and  is  or  can  be  bodily  transported. 

431 


432 


USE,   COINAGE,  AND   VALUE  OF  MONEY 


[CH.  45 


Difficulty  in 
applying 
the  defini- 
tion 


Standard, 
or  primary, 
money 


Gold-using 
countries 


The  application  of  the  definition  is  not  always  easy,  for 
money  shades  off  into  other  things  that  serve  the  same  pur- 
pose and  are  related  in  nature.  Even  special  students  differ 
as  to  the  border-line  of  the  concept,  but  as  to  the  general 
nature  of  money  there  is  essential  agreement.  In  many 
problems  it  appears  to  be  at  the  same  time  like  and  unlike 
other  things  of  value,  and  just  wherein  lies  the  difference 
often  is  difficult  to  determine.  The  use  of  money  is  of  such 
social  importance,  and  it  touches  so  many  practical  interests, 
that  it  raises  many  questions  of  a  political  and  ethical 
nature.  There  are  perhaps  more  popular  errors  on  this  than 
on  any  other  one  subject  in  economics.  Yet  the  general 
principles  of  money  are  as  fully  understood  and  as  firmly 
established  as  any  parts  of  economics. 

2.  The  precious  metals,  gold  and  silver,  are  the  standard, 
or  primary,  moneys  in  the  world  to-day.  Primary,  typical, 
standard  money  is  the  unit  in  which  the  value  of  the  money 
of -a  country  is  expressed,  no  matter  what  its  form  is;  the 
standard  is  a  certain  weight  and  fineness  of  a  particular 
metal.  Coins  of  this  standard  are  called  full,  or  real,  money 
by  some  writers  who  deny  the  title  of  money  to  everything 
else.  It  has  been  shown  before  that  there  has  been  an  evolu- 
tion in  the  use  of  money.  The  more  efficient  forms,  gold  and 
silver,  have  competed  with  copper,  iron,  tin,  cattle,  salt, 
tobacco.  In  this  contest  silver  had  proved  itself  a  few 
centuries  ago  to  be  the  fittest  medium  of  exchange,  but  in 
the  last  century  gold  has,  among  the  leading  nations,  been 
displacing  silver  rapidly.  In  a  higher  degree  than  any  other 
material,  gold  has  the  qualities  of  a  good  standard  money  in 
rich  and  industrially  developed  communities.  The  gold- 
using  countries  to-day  are  those  of  the  western  world.  Eng- 
land for  perhaps  two  centuries  practically  has  had  gold  as 
its  standard  money;  the  United  States  since  1834  (except  for 
the  period  of  paper  money  from  1862  to  1879)  ;  France  since 
about  the  year  1855,  at  which  time  she  shifted  from  silver 
under  the  working  of  the  bimetallic  law ;  and  Germany,  then 


*lj         THE  PKECIOUS  METALS  AS  MONEY        -A  a  3 

more  backward  industrially,  since  1873.  Australia  and 
Japan  .have  reached  that  result  only  within  the  last  few 
years,  and  Italy,  Russia,  India,  Mexico— even  China  and 
other  Oriental  countries— are  striving  to  attain  it. 

In  all  these  countries  other  kinds  of  money  are  used  side  subordinate 
by  side  with  gold  and  silver.  The  actual  money  consists  of  moneSy 
a  wide  and  confusing  variety:  silver,  nickel,  copper,  paper 
in  various  forms  and  issued  by  various  authorities.  But 
among  all  the  kinds,  either  gold  or  silver  is  found  standing 
preeminent  and  in  a  peculiar  position.  The  difficulties  of 
the  money  problem  must  be  attacked  at  the  point  of  standard 
money  where  it  is  nearest  to  ordinary  value  problems  and 
is  less  complicated  than  when  the  various  money  substitutes 
are  included.  Most  of  the  fallacies  regarding  money  have 
arisen  not  about  standard  money,  but  about  paper  and  light- 
weight silver. 

3.  Coinage  is  the  act  of  shaping  and  marking  a  piece  of  coinage 
metal  to  be  used  as  money  so  as  to  indicate  its  weight  and  c 
fineness.  The  precious  metals  can  and  do  circulate  as  money 
without  coinage.  Any  other  mark  equally  plain  and  equally 
recognizable  serves  for  many  purposes  just  as  well  as  the 
government  stamp  on  the  standard  metal.  The  use  of  metals 
in  antiquity  was  without  coinage,  by  weight  and  test  of  fine- 
ness. In  backward  countries  to-day  most  payments  are  made 
by  weight.  International  payments  are  made  by  means  of 
gold  ingots  that  bear  the  mark  of  some  well-known  banking- 
house,  and  for  that  purpose  gold  bullion  is  money  without 
the  coiner's  stamp.  But  for  most  uses  government  coinage 
has  marked  advantages.  It  is  far  more  convenient  for  the 
average  citizen  to  handle  coins  uniform  in  size  and  design 
than  the  diverse  coins  that  would  be  put  out  by  private  enter- 
prisers. 

An  established  rate  of  fineness  insuring  uniform  quality  Technical 
is  a  great  convenience.     In  the  United  States  all  gold  and   featuresof 

coinage 

silver  coins  are  nine  tenths  fine;  in  Great  Britain,  eleven 
twelfths.  The  established  weight  of  the  gold  dollar  in  the 

28 


434 


USE,   COINAGE,   AND  VALUE  OF   MONEY 


[CH.  45 


United  States  is  twenty-three  and  twenty-two  hundredths 
grains  of  fine  gold  or  twenty-five  and  eight  tenths  grains  of 
standard  gold.  .The  limit  of  tolerance  is  the  variation  either 
above  or  below  the  standard  weight  or  fineness  that  a  coin 
is  allowed  to  have  when  it  leaves  the  mint.  The  par  of 
exchange  between  standard  coins  of  different  countries  is 
the  expression  of  the  ratio  of  fine  gold  in  them.  Thus  the 
par  of  exchange  between  the  American  dollar  and  the 
English  sovereign  (the  "pound")  is  four  and  eighty-six 
and  two  third  hundredths,  that  is,  four  and  eighty-six  and 
two  third  hundredths  dollars  contain  the  same  amount  of 
gold  as  an  English  gold  sovereign.  The  embossed  design, 
milled  or  lettered  edges,  and  other  similar  devices  are 
merely  to  make  the  coins  easily  rcognizable  and  difficult  to 
counterfeit. 

4.  Seigniorage  is  the  right  the  ruler  or  state  has  to  charge 
for  coinage,  or  it  is  the  charge  made  for  coinage.  Coinage 
as  a  function  of  great  importance  politically  as  well  as  eco- 
nomically was  early  exercised  by  governments  or  rulers.  The 
prince,  king,  or  emperor  stamped  his  own  device  or  portrait 
upon  the  coin;  hence  the  term  seigniorage  from  seignior 
(meaning  lord  or  ruler).  The  right  to  issue  money  came  to 
be  one  of  the  most  essential  prerogatives  of  sovereignty. 
Coinage  is  rarely  without  charge,  and  often  has  been  a  source 
of  revenue  to  the  ruler.  In  the  Middle  Ages  this  right  was 
frequently  exercised  by  princes  for  their  selfish  advantage 
to  the  injury  and  unsettling  of  trade. 

When  no  charge  is  made  for  coinage,  the  coinage  is  said  to 
be  gratuitous.  Coinage  is  said  to  be  free  if  the  subject  or 
citizen  can  take  bullion  to  the  mint  whenever  he  pleases, 
paying  the  usual  seigniorage.  Coinage  is  limited  if  the  gov- 
ernment or  ruler  determines  when  coinage  is  to  take  place. 
Thus,  coinage  may  be  both  free  and  gratuitous,  when  citizens 
are  allowed  to  bring  bullion  whenever  they  please  and  have 
it  converted  into  coins  without  charge  or  deduction.  But 
coinage  is  free  without  being  gratuitous  when  any  citizen 


§  I]  THE   PRECIOUS  METALS  AS  MONEY  435 

may  bring  metal  to  the  mint,  whenever  he  chooses,  to  be 
coined  subject  to  the  seigniorage  charge. 

5.  Where  coinage  is  free  and  gratuitous  the  coin  is  worth  Money 
the  same  as  the  bullion  that  is  in  it.  This  evidently  and  J^J^ 
necessarily  must  be  near  the  truth  if  the  citizens  exercise 
their  right.  They  will  not  long  keep  metal  uncoined  in  their 
possession  when  it  is  worth  more  in  the  form  of  money,  nor 
will  they  long  keep  money  from  the  melting-pot  when  it  is 
worth  more  as  bullion.  Yet  there  may  be  a  slight  disparity  be- 
tween the  bullion  and  the  money  values  before  the  metal  is 
converted  into  coin  or  the  coin  melted  down  into  metal. 
A  motive  for  action  must  exist  before  either  change  will 
be  made;  but  a  thing  cannot  have-  considerably  different 
values  in  two  different  uses  at  the  same  moment. 

There  is  here  no  special  problem  of  value.  The  value  of  Adjustment 
gold  as  bullion  and  money  is  fixed  by  marginal  demand.  The  value*1 
several  uses  of  gold  are  constantly  competing  for  it:  its 
uses  for  rings,  pens,  ornaments,  championship  cups,  pho- 
tography, dentistry,  delicate  instruments,  and  as  a  circulating 
medium.  If  the  metal  becomes  worth  more  in  one  use,  its 
amount  there  is  increased  and  correspondingly  diminished 
in  the  others.  The  supply  likewise  is  influenced  by  changes 
in  price.  Gold-mining  is  one  among-  various  industries  to 
which  men  may  apply  their  labor  and  capital.  Some  mines 
are  superior,  others  average,  others  marginal  which  it  barely 
pays  to  work.  There  is,  therefore,  a  rise  and  fall  of  the  mar- 
gin of  production  with  change  in  price  and  change  in  cost 
of  production.  If  at  a  given  moment,  when  it  barely  pays 
to  work  a  mine,  gold  becomes  worth  less,  that  mine  will  go 
out  of  use.  As  gold  rises,  some  mines  that  did  not  pay  be- 
fore, come  into  use.  A  similar  variation  has  been  noted  in 
the  case  of  marginal  land,  marginal  factories,  marginal 
forges,  and  marginal  agents  of  every  kind. 

The  question  was  once  asked  in  Parliament,  "What  is  a   "What  is  a 
pound  ? ' '  and  a  good  question  to  ask  in  beginning  the  study  * 
of  money  is,  "What  is  a  dollar?"    The  answer,  so  far  as  it 


436  USE,    COINAGE,   AND  VALUE  OF   MONEY  [CH.  45 

refers  to  the  standard  money,  is:  a  dollar  is  a  convenient 
name  applied  to  twenty-three  and  twenty-two  hundredths 
grains  of  fine  gold  or  twenty-five  and  eight  tenths  grains  of 
standard  fineness.  The  exchange  value  of  gold  varies  in  dif- 
ferent places  and  conditions,  but  the  name  remains  the  same. 
A  dollar  exchanges  for  more  wheat  in  Dakota  than  in  New 
York  or  for  more  iron  in  Pittsburg  than  in  Oregon,  yet  it  is 
sometimes  asserted  that  the  value  is  always  the  same  because 
the  name  is  always  the  same.  The  fallacy  of  this  nay  be 
seen  in  the  equivalent  expression  that  twenty-three  and 
twenty-two  hundredths  grains  of  gold  have  the  same  value 
always  and  under  all  circumstances. 

The  problem  of  the  bullion  value  of  money  metal,  under 
gratuitous  coinage,  presents  no  special  difficulties.  The  ordi- 
nary theory  of  value  applies  to  it.  The  difficulties  of  the 
money  question  begin  at  the  point  where  the  money  value  is 
seen  to  diverge  from,  and  depend  on,  something  else  than  the 
value  of  the  bullion.  Yet  in  the  principles  just  discussed 
are  found  a  firm  foundation  for  any  further  study  of  the 
question. 

§  II.      THE    QUANTITY   THEORY   OF    MONEY 

The  money  1.  The  fundamental  use  that  money  serves  is  to  apportion 
incomes  of  goods  so  as  to  make  them  yield  the  maximum  grat- 
ification. Money  first  increases  utility  by  increasing  the  ease 
with  which  exchange  takes  place.  Like  any  tool  or  agent,  it 
is  valued  for  what  it  does  or  helps  to  do.  But  further,  it 
enhances  the  sum  of  enjoyments  by  the  division  of  goods  into 
proper  quantities,  making  them  available  at  the  best  time. 
It  follows  from  the  principle  of  diminishing  utility  that  the 
particular  time  at  which  goods  are  available  for  wants  has 
an  essential  bearing  on  their  value.  A  hundred  loaves  of 
bread  in  the  hands  of  a  single  individual  would  mold  long 
before  they  could  be  consumed.  Money  enables  men  in  soci- 
ety to  acquire  these  hundred  loaves  in  a  series  so  that  they 


§  IIJ  THE  QUANTITY  THEORY  OF  MONEY  437 

can  be  used  when  most  needed.  Money  is  the  most  suc- 
cessful device  man  has  ever  discovered  for  distributing  the 
supplies  of  a  journey  along  its  course,  and  the  goods  of  daily 
need  over  a  period  of  time.  The  use  of  money  as  a 
storehouse  of  value  is  merely  an  extreme  case  of  keeping 
things  for  the  future  when  they  will  have  a  greater  gratify- 
ing power. 

The  fact  that  money  is  essentially  a  valuable  good  kept  concept  of 
on  hand  as  the  best  possible  provision  against  emergencies  the  money 
points  to  the  essential  nature  of  the  money  demand.  Money 
is  sought,  in  order  to  form  a  cash  reserve,  up  to  a  point  where 
the  loss  from  keeping  it  balances  the  probable  gain.  The 
money  use  is  subject  to  the  law  of  diminishing  utility ;  beyond 
a  certain  point  its  added  convenience  is  purchased  at  too 
great  cost.  Every  man  may  be  thought  of  as  having  an 
average,  or  usual,  money  demand,  which  is  that  proportion 
of  his  income  that  gives  him  more  utility  retained  in  money 
form  than  if  at  once  expended.  A  man  with  an  income  and 
expenditure  of  fifty  dollars  a  month  paid  monthly  has  use 
ordinarily  for  no  more  than  fifty  dollars  as  his  cash  reserve. 
While  under  ordinary  circumstances  this  is  his  maximum 
demand,  various  circumstances  may  diminish  it.  If  his  ex-  variation  in 
penses  are  distributed  in  two  equal  parts  (the  one  on  pay-day,  tne  averaee 
the  other  thirty  days  later)  his  average  money  demand  is 
twenty-five  dollars,  not  fifty  dollars.  If  most  of  his  pur- 
chasing is  done  at  the  beginning  of  the  month,  his  average 
money  demand  may  be  perhaps  ten  dollars.  Many  a  work- 
man purchases  on  credit,  spends  his  fifty  dollars  within  an 
hour  after  he  receives  it,  and  goes  without  money  for  the 
rest  of  the  month.  The  average  demand  of  a  community 
for  money  required  as  a  reserve  is  affected  by  the  methods  of 
doing  business.  With  a  given  method  of  use  a  reduction  in 
the  supply  of  money  results  in  loss  of  time  and  waste  of 
effort ;  an  increase  in  the  supply  results  in  a  lowering  of  its 
value  relative  to  other  things.  In  either  case  the  equilibrium 
of  the  marginal  utilities  of  income  must  be  restored.  The 


438 


USE,   COINAGE,   AND  VALUE  OF  MONEY 


[CH.  45 


The  quan- 
tity theory 
of  money 


Example  of 
its  applica- 
tion 


thought  of  an  average,  rational,  money  demand  relative  to 
money  income  is  the  fundamental  requisite  for  clear  thinking 
on  the  question  of  money,  but  to  grasp  this  thought  there 
is  needed  a  certain  power  of  scientific  imagination  lacking 
in  some  minds. 

2.  The  quantity  theory  of  money  is  that,  other  things 
being  equal,  the  value  of  money  falls  as  its  quantity  in- 
creases, and  vice  versa.  This  is  an  abstract  statement  of  a 
concrete  and  difficult  problem.  The  phrase  "other  things 
being  equal"  betokens  the  statement  of  a  tendency  where 
there  are  several  unknown  factors.  In  recent  discussion  the 
quantity  theory  of  money  has  been  questioned  by  some 
critics;  yet  it  is  held  by  most  economists  to  be  merely  the 
general  law  of  value  as  applied  to  money.  There  are  three 
sets  of  facts  to  be  brought  into  relationship  with  each  other 
in  the  quantity  theory :  ( 1 )  amount  of  business  or  exchanges 
to  be  effected;  (2)  the  methods  by  which  this  is  done;  (3) 
the  amount  of  money  available  to  do  it.  According  to  the 
quantity  theory  we  must  expect  that  when  conditions  (1) 
and  (2)  remain  fixed,  the  value  of  money  will  vary  inversely 
as  its  quantity.  This  conclusion  follows  from  the  conception 
of  the  money  demand  as  the  value  of  circulating  medium 
that  bears  an  average  proportion  to  the  value  of  goods  ex- 
changed. 

Let  us  consider  various  conditions.  When  a  number  of 
men,  by  reason  of  increasing  gold  supplies,  get  larger  stocks 
of  money  than  they  have  had,  the  former  proportion  between 
their  money  incomes  and  their  money  is  altered.  In  re- 
ducing their  stock  of  money  by  buying  goods  they  bid  up 
the  prices  of  goods  until  the  total  value  of  goods  exchanged 
again  bears  the  same  ratio  as  before  to  the  total  value  of 
money.  Taking  an  extreme  case :  if  twice  as  many  dollars 
get  into  circulation  in  a  community,  either  some  few  men 
must  have  several  times  as  many  dollars  as  before,  while 
others  have  the  same;  or  every  man  will  have  his  due  pro- 
portion, just  twice  as  much  as  before.  The  latter,  "other 


§11]  THE   QUANTITY   THEORY  OF   MONEY  439 

things  being  equal,"  must  be  the  logical  result  after  equi- 
librium has  been  restored.  Is  any  other  result  thinkable? 
Now  if  prices  of  goods  remained  the  same  as  before,  there 
would  be  twice  as  great  a  value  of  money  available  to  effect 
exchanges.  There  is  no  reason  why  each  should  tie  up  twice 
a§  large  a  proportion  of  his  income  in  a  supply  of  the  medium 
of  exchange.  If,  however,  there  is  a  concerted  movement  to 
spend  the  surplus  money,  there  results  a  general  bidding 
down  of  the  exchange  value  of  money,  a  general  bidding  up 
of  prices  of  goods.  At  what  point  will  this  movement  stop  ? 
The  rational  conclusion  must  be  that  "other  things  being 
equal"  equilibrium  will  be  reestablished  only  when  the  ratio 
between  the  value  of  money  and  the  j>rice  of  goods  becomes 
the  same  as  before.  The  money  being  doubled,  prices  must 
be  double,  and  likewise  for  any  other  change  in  quantity. 

3.  The  quantity  theory  is  misunderstood,  and  is  criticized  objections 
on  the  ground  that  the  facts  oppose  it.  If  but  one  kind  of  r 
metal  were  used  as  money,  and  this  were  coined  of  uniform  theory 
weight  and  fineness,  the  problem  would  be  comparatively 
simple.  But  in  fact  gold  and  silver,  full-weight  and  light- 
weight coins,  circulate  side  by  side.  More  mysterious  still, 
the  money  in  circulation  is  partly  coin  and  partly  paper. 
How  can  the  quantity  theory  hold  in  these  conditions  ?  Sev- 
eral objections  to  the  quantity  theory  are  presented.  It  is 
said,  first,  that  prices  do  not  vary  exactly  with  the  per  capita 
circulation  of  different  countries  at  a  given  moment.  The 
per  capita  circulation  in  Mexico  may  be  five  dollars  and  in 
the  United  States  twenty-five  dollars,  while  prices  are  much 
less  than  five  times  as  great  here  as  in  Mexico.  Secondly,  it  is 
said  that  prices  do  not  vary  directly  with  changes  in  the 
amount  of  money  in  a  given  country.  There  is  now  perhaps 
five  times  as  much  money  per  capita  in  the  United  States  as 
fifty  years  ago  and  yet  prices  are  not  five  times  as  high. 
Thirdly,  it  is  said  that  credit  methods  change,  and  therefore 
that  money  does  not  fix  prices.  Fourthly,  it  is  said  that  even 
if  true  of  primary  money  the  theory  fails  to  apply  to  actual 


440 


USE,   COINAGE,   AND   VALUE   OF   MONEY 


[OH.  45 


The  objec- 
tions 
examined 


Not  a  per 
capita  rule 


Recognizes 
the  growth 
of  trade 


Recognizes 
use  of  credit 


Not confined 
to  primary 
money 


conditions  with  many  forms  of  money  in  circulation  side  by 
side.  Fifthly,  it  is  said  that  there  are  too  many  unknown 
quantities  to  permit  the  rule  to  be  used. 

4.  A  reasonable  interpretation  of  the  quantity  theory 
makes  it  a  statement  of  the  effect  of  a  change  in  a  single 
factor.  The  objections  to  the  quantity  theory  assume  thaf  it 
is  a  statement  of  what  occurs  under  all  conditions,  instead 
of  what  it  is,  an  index  to  the  working  of  one  condition  at  a 
time.  The  foregoing  objections  need  but  to  be  further  an- 
alyzed to  show  that  in  each  of  them  it  is  not  merely  the 
quantity  of  money,  but  a  number  of  other  factors  that  differ 
in  each  of  the  propositions.  We  may  note  briefly  in  turn  the 
defects  in  the  arguments  of  the  preceding  paragraph. 

First,  the  quantity  theory  does  not  remotely  imply  that 
prices  in  different  countries  differ  at  a  given  moment  accord- 
ing to  the  per  capita  money.  In  the  case  of  the  United  States 
and  Mexico  not  only  the  amount  of  exchange  per  capita  but 
the  method  of  exchange,  and  the  rapidity  of  the  circulation 
of  money  differ  quite  as  much,  doubtless,  as  does  the  per 
capita  circulation.  The  quantity  theory  would  lead  any 
fairly  careful  student  to  a  conclusion  the  exact  opposite  of 
that  which  its  critics  have  twisted  from  it. 

Second,  the  quantity  theory  does  not  imply  that  during 
a  period  of  years  when  a  country  is  changing  in  a  multitude 
of  ways,  as  in  population,  methods  of  industry,  modes  of  ex- 
change and  transportation,  and  in  wealth  and  income,  the 
prices  will  vary  directly  either  as  the  absolute  or  per  capita 
amount  of  money  does.  In  the  light  of  the  quantity  theory 
the  inquirer  must  be  led  to  just  the  opposite  of  the  ridiculous 
conclusion  imputed  to  it. 

Third,  the  theory  does  not  overlook  the  effect  of  an  in- 
creased use  of  credit,  for  it  fully  implies  that  any  such  a 
change,  by  economizing  the  use  of  money,  would  enable  the 
same  amount  of  money  to  support  a  higher  scale  of  prices. 

Fourth,  the  theory  does  not  overlook  the  variety  of  forms, 
and  is  not  true  merely  of  primary  money.  However  great 


§11]  THE  QUANTITY   THEORY   OF   MONEY  441 

this  variety,  the  money  demand  of  individuals  and  of  com- 
munities still  represents  a  pretty  definite  ratio  of  the  value 
of  exchanges  effected.  If  the  primary  money  alone  were 
doubled  in  quantity,  while  the  various  forms  of  substitute 
money  (smaller  coins,  bank-notes,  government  notes,  etc.) 
remained  unchanged,  the  quantity  of  money  as  a  whole  would 
not  be  doubled,  and  according  to  the  theory,  prices  would  not 
be  expected  to  double.  Indeed,  in  such  a  case,  the  method  of 
exchange  would  be  very  greatly  altered,  and  the  case  is  fully 
covered  by  the  statement  of  the  theory. 

Fifth,  despite  the  number  of  changing  factors  affecting  isapracti- 
the  methods  of  exchange,  the  method  of  business,  etc.,  the  calrule 
quantity  theory  is  a  rule  usable  at  any  moment.  These 
various  factors  change  slowly,  and  the  quantity  theory  an- 
swers the  question,  What  change  occurs  in  prices  as  a  result 
of  an  increase  or  decrease  of  the  money  in  a  given  community 
at  a  given  moment  ?  Like  the  law  of  gravitation,  the  law  of 
projectiles,  and  the  statement  of  the  chemical  reaction  to  be 
expected  when  adding  some  substance  to  a  given  compound, 
the  theory  must  be  interpreted  with  practical  limitations. 
When  the  quantity  theory  is  thus  stated  and  understood,  its 
negation  is  unthinkable,  as  is  evidenced  by  the  involuntary 
use  made  of  it  constantly  by  every  one  of  its  few  critics  in 
explaining  the  simplest  monetary  phenomena. 

5.     The  quantity  theory  makes  intelligible  the  great  and  Practical 
rapid  changes  in  price  that  have  followed  sudden  changes  ^JJl^uan 
in  the  money  supply.     Inductive  demonstration  of  broadly  tity theory 
stated  economic  principles  is  difficult,  but  in  no  other  eco- 
nomic problem  is  laboratory  experiment  so  nearly  possible 
as  in  that  of  money.    Many  inflations  and  contractions  of  the 
circulating  medium  have  occurred,  now  in  a  single  country, 
again  in  the  entire  world,  and  the  local  or  general  results 
have  served  to  exemplify  richly  the  working  of  the  quantity 
principle.    With  the  scanty  yield  of  silver-  and  gold-mines 
in  the  Middle  Ages,  prices  were  low.    After  the  discovery  of 
America,  especially  in  the  sixteenth  century,  quantities  of 


442  USE,  COINAGE,  AND  VALUE  OF   MONEY  [CH.  45 

silver  flowed  into  Europe.  The  great  rise  of  prices  that 
occurred  was  explained  by  the  keenest  thinkers  of  that  day 
along  the  essential  lines  of  the  quantity  theory,  though  there 
were  many  monetary  fallacies  current  at  the  time.  The 
experience  in  England  during  the  Napoleonic  wars,  when  the 
money  of  England  was  inflated  and  prices  rose  above  those 
Recent  price  of  the  Continent,  led  to  the  modern  formulation  of  the  theory 
by  Ricardo  and  others.  The  discovery  of  gold  in  California 
and  Australia,  in  1848-50,  increased  the  gold  supply  marvel  - 
ously,  and  gold  prices  rose  throughout  the  world.  Between 
1870  and  1890  the  production  of  gold  fell  off  greatly  while 
its  use  as  money  increased  and  prices  fell.  A  great  increase 
of  gold  production  has  occurred  in  the  period  since  1890. 
In  part  the  rising  prices  from  1897  to  1902  are  explicable 
as  the  periodic  upswing  of  confidence  and  credit,  but  in  part 
doubtless  they  are  due  to  the  stimulus  of  increasing  gold 
supplies.  These  are  but  a  few  of  many  instances  in  monetary 
history  which,  taken  together,  make  an  argument  of  prob- 
ability in  favor  of  the  quantity  theory  so  strong  as  to  con- 
stitute practically  its  inductive  proof. 


CHAPTER  46 

TOKEN  COINAGE  AND  GOVERNMENT  PAPER 

MONEY 

§  I.      LIGHT-WEIGHT  COINS 

1.     When  the  number  of  coins  issued  is  limited  properly,   seigniorage 
a  seigniorage  charge  does  not  reduce  their  money  value;  ^u^f 
they  are  worth  more  as  money  than  as  bullion.    The  coinage  coins 
thus  far  considered  has  been  that  of  full-weight  coins  with- 
out seigniorage.     The  question  now  is,  What  is  the  effect 
of  a  seigniorage  charge  on  the  value  of  the  coin  as  com- 
pared with  the  bullion  that  is  in  it?     This  is  one  of  the 
most  difficult  phases  of  monetary  theory.    Two  values  must 
be  thought  of :  one  the  value  of  the  coin  as  money,  the  other 
the  value  of  the  bullion  in  it.     When  coinage  is  free  and 
gratuitous,  these  two  values  are  the  same.     How  can  they 
ever  be  different?     The  answer  to  the  question  is  found  in 
the  theory  of  monopoly  value.    If  the  supply  of  coin  is  lim- 
ited by  the  sole  agency  of  issue,  the  value  can  be  kept  above  saturation 
the  cost  of  production  (i.e.,  in  this  case  the  bullion  value),   J£jj£g°r 
the  seigniorage  being  the  profit  of  the  government.     The 
limit  within  which  the  coinage  must  be  kept  is  the  number 
of  coins  that  would  circulate  freely  if  they  were  made  full 
weight  without  a  seigniorage  charge.    This  is  the  "  saturation 
point"  of  the  money  demand  of  the  country;  it  is  a  certain 
number  of  pieces  of  full-weight  metal.     If  more  than  that 
amount  gets  into  circulation  it  becomes  worth  less  as  money 
than  as  bullion,  and  it  is  melted  or  exported. 

If  this  full  supply  of  money  at  a  given  moment  is  100,000 

443 


444 


TOKEN  AND  PAPER  MONEY 


[CH.  46 


Example  of 
seigniorage 
value  in 
coins 


Example 
of  excess 
and  depre- 
ciation of 
coins 


Medieval 
examples  of 
depreciation 


pieces  or  dollars,  a  seigniorage  charge  of  ten  per  cent,  could 
be  made  if  the  number  of  pieces  were  not  increased  above 
100,000.  The  government  alone  having  the  right  of  coinage, 
the  need  of  money  would  give  the  circulating  medium  a 
monopoly  value.  The  value  of  the  money  would  rise  until  the 
coin  would  buy  one  ninth  more  bullion  than  was  in  it,  but  if 
there  were  any  further  rise  the  citizens  would  begin  to  take 
coins  to  the  mint.  After  the  ten  per  cent,  charge  was  taken 
out  they  would  receive  a  coin  which,  though  containing  one 
tenth  less  bullion,  would  be  worth  very  nearly  the  same  as 
the  metal  taken  to  the  mint.  No  considerable  depreciation 
could  take  place  unless  the  volume  of  business  fell  off  so 
that  less  money  was  needed  than  at  the  old  standard.  In 
that  case  there  would  be  no  outlet  for  the  excess  of  coins  un- 
til they  fell  to  their  bullion  value,  i.e.,  till  they  lost  the 
entire  value  of  the  seigniorage,  the  monopoly  element  in 
them.  Melting  or  exporting  them  before  that  point  was 
reached  would  cause  the  loss  of  whatever  element  of  seignior- 
age value  they  contained. 

Assuming  that  the  volume  of  business,  or  sum  of  ex- 
changes, remains  unchanged,  let  us  consider  what  will  re- 
sult if  the  government  begins  to  issue  '  *  on  its  own  account. ' ' 
The  number  of  coins  might  be  increased  until  at  the  bullion 
price  the  total  money  value  were  equal  to  the  original 
100,000  full-weight  coins,  at  which  point  exportation  would 
take  place.  There  being  nine  tenths  as  much  precious  metal 
as  before,  it  would  require  ten  ninths  as  many  pieces,  or 
111,111  pieces,  to  have  as  great  a  value  as  the  100,000  had 
before.  At  this  point  there  is  no  further  profit  to  the  gov- 
ernment in  issuing  coins  of  that  weight.  To  make  a  further 
profit  it  must  again  reduce  the  amount  of  pure  metal  in 
the  coin. 

This  is  essentially  what  occurred  often  throughout  the 
Middle  Ages.  A  ruler  debased  the  quality  or  reduced  the 
weight  of  money,  but  for  a  time  the  new  coin,  having  the 
same  money  use,  circulated  as  freely  as  the  old  coin.  If, 


§1]  LIGHT-WEIGHT  COINS  445 

as  so  often  happened,  the  ruler  yielded  to  the  temptation 
to  issue  more  in  order  to  get  the  profit,  the  older,  heavier 
coins  at  once  began  to  go  abroad  or  into  the  melting-pot. 
Then  occurred  a  fall  in  value,  mystifying  alike  to  the  prince 
and  the  people.  The  reason  is  now  perfectly  plain:  the 
number  of  pieces  issued  had  not  been  kept  within  the  proper 
limits,  and  the  coins  went  down  to  their  bullion  value. 

2.     Subsidiary  coins  of  lighter  weight  than  the  standard,   Difficulties 
if   properly    limited,    will    remain    in    circulation    at    par.  ^*£^\>- 
Money  to   serve  all  of  its  purposes  must  be  of  different  sidiarycoins 
denominations.     The  amount  required  of  each  denomination 
is  determined  by  the  volume  of  exchanges  for  which  each  is 
most  convenient.    Each  kind  of  money,  as  the  penny,  nickel, 
dime,  has  its  own  peculiar  demand  and  its  saturation  point. 
For  the  smaller  denominations  the  standard  metal  is  not 
suitable.    A  gold  dollar  cannot  well  be  cut  into  twenty  or  a 
hundred  pieces.     Thus  copper,  nickel,  silver  remain  in  re- 
stricted use.     When  these  are  issued  at  their  bullion  value, 
difficulties  arise;  not  only  are  they  too  heavy,  but  as  they 
vary  in  bullion  value,  some  of  them  become  worth  more  as 
bullion  than  as  coin,  and  suddenly  disappear  from  circu- 
lation. 

This  happened  often  throughout  the  Middle  Ages  and  Adoption  of 
until   the   nineteenth  century.     Gold  and   silver  generally  l^\t 
were  coined  at  a  ratio  of  weight  corresponding  exactly  to  minor  coins 
their  market  ratio  at  a  given  moment,  and  every  time  the 
market  conditions  varied,  one  kind  of  the  money  went  out  of 
circulation,    and   the   country   was  left   either  without  the 
larger  gold   coins,   or  without   subsidiary   coin,   or   "small 
change."     At  length  the  plan  was  hit  upon  of  issuing  a 
limited  number  of  subsidiary  coins  of  less  than  full  bullion 
value,  that  is,   as  "token   coins."     By  this  plan  there  is 
given  to  the  minor  coins  a  value  greater  than  that  of  the 
bullion  in  them.     The  small  profit  made  by  the  government 
on  every  penny,   nickel,   or  dime  issued,   is  a  seigniorage 
charge.    These  minor  coins,  in  somewhat  confusing  variety, 


446 


TOKEN  AND  PAPER  MONEY 


LCH.  40 


Theory  of 
light- 
weight 
coins 


Gresham's 
law 


Proper  in- 
terpretation 
of  Gre- 
sham's law 


circulate  side  by  side  with  full-weight  money,  their  value 
depending  on  the  monopoly  principle.  The  result  of  a  large 
issue  of  any  one  denomination  would  be  a  lowering  of  its 
value.  In  practice  their  issue  is  determined  by  the  needs 
of  business  and  by  the  requests  of  citizens  for  small  coins 
in  exchange  for  standard  money.  One  needing  "change" 
gets  it  at  the  bank;  when  the  bank  finds  its  supply  falling 
short  it  gets  more  from  the  government  mints.  As  business 
increased  in  1898,  the  demand  for  nickels,  dimes,  and  quar- 
ters became  unprecedented,  and  the  mints  worked  night  and 
day  to  supply  them. 

3.  Gresham's  law  of  the  circulation  of  coins  of  different 
bullion  value  is:  bad  money  drives  out  good  money.  This 
so-called  "law"  was  stated  in  these  circumstances:  Eng- 
land had  two  kinds  of  metal  money,  silver  and  gold,  which 
were  coined  at  a  fixed  ratio  in  weight;  and  as  the  market 
value  of  the  bullion  changed,  the  new  full-weight  coins  of  the 
metal  rising  in  value  went  out  of  circulation.  The  coining 
of  the  cheaper  metal  caused  the  melting  or  exporting  of  the 
one  becoming  dearer,  and  for  those  purposes  the  coins  con- 
taining the  most  bullion  were  picked.  Likewise  full-weight 
coins  disappear  whenever  money  of  less  bullion  value  (either 
because  containing  more  alloy,  or  because  made  of  a  cheaper 
metal  or  of  paper)  is  poured  into  the  circulation  in  large 
quantities. 

Gresham's  law  needs  some  explanation,  for  it  is  frequently 
misunderstood.  "Bad"  money  means  money  that  has  not 
the  bullion  value  equal  to  its  money  value,  money  that  is 
either  debased  in  quality  or  light  in  weight.  But  not  every 
piece  of  bad  money  will  drive  out  every  piece  of  good  money. 
If  that  were  so,  a  single  bad  penny  would  drive  out  of 
circulation  all  the  gold.  The  law  applies  only  under  certain 
conditions.  The  "good"  will  leave  the  country  only  if  the 
total  amount  of  money  in  circulation  is  in  excess  of  what 
would  be  needed  if  all  were  of  full  weight  or  best  quality. 
Paradoxically  speaking,  if  there  is  not  too  much  of  the  bad 


511]  PAPER   MONEY  EXPERIMENTS  447 

money,  it  is  just  as  good  as  the  good  money.  The  good 
money  may  not  leave  the  country.  It  may  be  hoarded,  or  be 
picked  out  by  banks  and  savings-institutions  to  retain  as 
their  reserve,  or  it  may  be  melted  for  use  in  the  arts. 
Gresham's  "law"  is  thus  a  practical  precept:  keep  the 
amount  of  token  or  light-weight  coin  limited  to  the  field 
of  its  peculiar  use,  or  it  will  cause  the  other  forms,  the 
fuller  weight  money,  to  leave  for  a  better  market.  That 
better  market  may  be  the  melting-pot  or  it  may  be  a  foreign 
country. 

§  II.       PAPER    MONEY   EXPERIMENTS 

1.     Government  paper  money  may  be  defined  as  money  Nature  of 

s  7.7  ..  ,,  .     •       T  7     papermoney 

for  which  a  seigniorage  of  one  hundred  per  cent,  is  charged. 
The  order  in  the  study  of  the  money  question  is  from 
seigniorage  to  paper  money,  because  paper  money  embodies 
the  principle  of  seigniorage  in  its  extremest  form.  The 
issue  of  paper  money  grew  out  of  the  practice  of  debasing 
metal.  The  gain  of  seigniorage  from  paper  money  is  greater 
and  is  just  as  easily  secured.  Government  paper  money  is 
sometimes  called  "political  money,"  in  contrast  with  money 
whose  value  rests  on  the  value  of  its  material.  In  this  sense, 
however,  all  coins  containing  an  element  of  seigniorage,  or 
monopoly  value,  are  to  that  degree  "political"  money.  The 
typical  paper  money  is  irredeemable,  that  is,  it  cannot  be 
turned  into  bullion  money  on  demand.  It  was  simply  put 
into  circulation  with  the  legal-tender  quality.  The  "legal- 
tender"  quality  is  the  declaration  of  the  government  that  Theiegai- 
the  paper  money  must  be  accepted  by  citizens  as  a  legal 
discharge  for  debts  due  them.  The  object  of  this  is  to 
compel  people  to  use  it  as  money  whether  they  will  or  not. 
The  purpose  of  the  government  in  thus  employing  its  power 
over  the  circulating  medium  is  usually  to  profit,  that  is,  to 
secure  the  value  of  the  seigniorage  for  public  purposes. 
Paper  money  differs  from  bank-notes  in  that  it  does  not 
depend  for  its  redemption  on  the  credit  of  the  issuer.  It 


448 


TOKEN  AND   PAPER  MONEY 


[OH.  46 


Examples  of 


teenth  cen- 


differs  from  bonds  in  that  its  value  is  not  based  on  the  in- 
terest it  yields,  but  solely  on  its  money  uses.  The  issue  of 
paper  money  may  save  the  government  the  payment  of 
interest  on  an  equal  amount  of  bonds.  The  promise  to 
receive  paper  money  in  payment  for  taxes  or  for  public  lands, 
may  help  to  maintain  the  value  of  the  notes  by  reducing 
their  quantity,  but  nothing  short  of  prompt  exchange  for 
standard  coins  makes  them  truly  redeemable. 

2.  The  most  notable  examples  of  paper  money  in  the 
ewhteenth  century  were  the  American  colonial  currencies, 
the  continental  notes,  and  the  French  assignats.  In  all  the 
American  colonies  before  the  Revolution  notes  or  bills  of 
credit  were  issued  which  were  in  most  cases  legal  tender. 
Without  exception  they  were  issued  in  large  amounts  and 
without  exception  they  depreciated.  Parliament  forbade 
the  issues,  but  to  no  effect.  The  continental  notes  were  is- 
sued by  the  Continental  Congress  in  the  first  year  of  the 
war  (1775),  and  for  the  next  five  years.  The  object  at  first 
was  to  anticipate  taxes,  and  it  was  expected  that  the  states 
would  redeem  and  destroy  the  notes,  but  this  was  not  done. 
The  notes  passed  at  par  for  a  time,  but  depreciated  rapidly 
as  their  number  increased.  The  country  had  less  than 
$10,000,000  of  coin  before  the  war,  and  when,  in  1780,  over 
$200,000,000  of  notes  were  in  circulation  they  were  com- 
pletely discredited;  hence  the  phrase  "not  worth  a  conti- 
nental." Specie  quickly  came  back  into  use.  A  few  years 
later  the  leaders  of  the  French  Revolution,  failing  to  learn 
the  lesson  of  the  American  experience,  issued,  on  the  security 
of  land,  notes  called  assignats  in  such  enormous  quantities 
that  they  became  worth  no  more  than  the  paper  on  which 
they  were  printed.  In  a  figurative  sense  they  may  be  said 
to  have  fallen  to  their  "bullion"  value. 

More  recent  3.  Notable  examples  of  paper  money  in  the  nineteenth 
century  were  the  English  bank-notes  in  the  years  1797- 
1820,  and  the  American  greenbacks,  1862-79.  There  have 
been  many  other  examples.  During  the  Franco-Prussian 


§11]  PAPER   MONEY  EXPERIMENTS  449 

War,  France,  through  the  medium  of  its  great  state  bank, 
issued  notes  which  only  slightly  depreciated.  At  the  present 
time  many  countries— Russia,  Austria,  Portugal,  Italy,  all 
the  South  American  republics— have  depreciated  paper  cur- 
rencies. But  the  English  bank  restriction  of  1797-1820 
is  notable  because  it  gave  rise  to  the  controversy  which  did 
most  to  develop  the  modern  theory  of  the  subject.  The 
Bank  of  England  was  forbidden  to  redeem  its  notes  in  coin 
because  the  government  wished  to  borrow  all  the  coin  the 
bank  had.  The  result  was  the  issue  of  a  large  amount  of 
bank  money  not  subject  to  the  ordinary  rule  of  redemption 
on  demand.  It  was  virtually  government  paper  money.  The 
notes  depreciated  and  drove  gold  out  of  circulation,  and  not 
until  1820  was  there  a  return  to  specie  payments. 

The  United  States  under  the  constitution  did  not  try  paper 
money  till  1862  when  paper  notes   (called  greenbacks,  be- 
cause of  the  color  of  ink  with  which  the  reverse  side  was 
printed)  were  issued  as  a  war  measure  to  the  amount  of 
about  $450,000,000.     Other  interest-bearing  notes  were  is-   The  green- 
sued  with  legal-tender  quality  and  circulated  as  money  to  backs 
some  extent.     Greenbacks  depreciated  in  terms  of  gold,  and 
gold  rose  in  price  until,  in  June,  1864,  it  sold  at  two  hundred 
and  eighty  a  hundred.    Fourteen  years  elapsed  after  the  war 
before  these  notes  rose  to  par,  in  terms  of  gold. 

4.  Paper-money  issues  usually  have  had  injurious  effects  Evil  effects 
on  general  industry.  The  purpose  of  the  issue  of  paper 
money  is  generally  to  relieve  the  financial  necessities  of  the 
government.  It  is  a  costly  expedient,  resorted  to  only  in 
desperate  extremities.  A  result  usually  unintended  is  the 
derangement  of  business  and  of  the  existing  distribution  of 
incomes.  The  rapid  and  unpredictable  changes  in  prices 
give  opportunity  for  speculative  profits,  but  most  legitimate 
business  is  injured.  This  incidental  effect  on  debts  and  in- 
dustry becomes  the  main  motive  of  some  citizens  in  advo- 
cating the  issue.  It  is  peculiarly  liable  to  be  the  subject  of 
political  intrigue  and  of  popular  misunderstanding. 


450 


TOKEN  AND   PAPER  MONEY 


[CH.  46 


Commodity- 
money 
theory 


Flat-money 
theory 


§  III.      THEORIES    OF    POLITICAL    MONEY 

1.  The  commodity-money  theorists  declare  that  govern- 
ment is  powerless  to  influence  value,  or  to  impart  value  to 
paper  by  law.      There  are  two  extreme  views  regarding  the 
nature  of  paper  money,  and  a  third  which  endeavors  to  find 
the  truth  between  these  two.     First  is  that  of  the  commodity- 
money  theorists,  or  the  cost-of-production  theorists,  who  will 
not  admit  that  there  is  any  other  basis  for  the  value  of 
money  than  the  cost  of  the  material  that  is  in  it.     Money 
made  of  paper,  on  a  printing  press,  has  a  cost  almost  neg- 
ligibly small,  and,  therefore,  they  say  it  can  have  no  value. 
The  fact  that  it  does  circulate,  and  is  treated  as  if  it  had 
value,  is  explained  by  the  commodity  theorists  as  follows : 
While  the  paper  note  is  a  mere  promise  to  pay,  with  no  value 
in  itself,  it  is  accepted  because  of  the  hope  of  its  redemp- 
tion, just  as  is  any  private  note.    Depreciation  in  this  view 
is  due  to  loss  of  confidence ;  the  rise  toward  par  measures  the 
hope  of  repayment.     Such  a  view  overlooks  the  feature  in 
which  paper  money  differs  from  ordinary  credit  paper.    The 
value  of  one's  promise  to  pay  depends  on  his  reputation  and 
his  resources;  the  resources  constitute  the  basis  of  value. 
Bonds  have  value  because  they  yield  interest  and  are  pay- 
able at  a  definite  time  in  standard  money.    But  paper  money, 
lacking  this  basis  for  its  value,  has  another  basis  in  its  money 
use,  in  its  power  to  buy  goods.    The  money  demand  in  con- 
nection with  the  monopoly  power  of  government  over  the 
money  supply,  furnishes  a  satisfactory  logical  explanation  of 
the  value  of  paper  money. 

2.  The  fiat-money  advocates  assert  that  government  has 
unlimited  power  to  maintain  the  value  of  paper  money  l>y 
conferring  upon  it  the  legal-tender  quality.    The  meaning  of 
fiat  is  "let  there  be,"  and  the  fiat-money  advocates  believe 
that  the  government  has  but  to  say,  "let  it  be  money,"  to 
invest  paper  with  value.     The  typical  fiat  advocates  in  the 


I  III]  THEORIES  OF  POLITICAL  MONEY  451 

United  States  were  the  ' '  Greenbackers,  • '  those  voters  who 
wished  to  retain  the  paper  money  issued  in  the  Civil  War, 
and  to  increase  its  amount  greatly.  They  saw  in  paper 
money  an  unlimited  source  of  income  to  the  government. 
They  proposed  the  payment  of  the  national  debt,  the  support 
of  the  government  without  taxes,  and  the  loan  of  unlimited 
money  without  interest  to  citizens.  All  might  live  in  luxury 
if  the  extreme  fiat-money  theorists  could  realize  their  dream. 
There  are  still  some  survivors  of  this  faith  in  the  power  of 
the  government  fiat.  The  depreciation  that  has  taken  place 
in  every  case  where  government  notes  have  been  issued,  they 
declare  to  be  due  to  a  too  mild  enforcement  of  the  law  of 
legal  tender.  To  them  the  fact  that  paper  money  may  circu- 
late for  a  time  at  par  appears  a  reason  why  it  always  should. 
They  do  not  admit  that  there  is  a  saturation  point  in  the  use 
of  money,  and  that  its  use  is  still  further  limited  by  the 
fear  of  larger  issues.  They  do  not  see  that  the  ultimate  basis 
of  the  value  of  paper  money  is  economic,— is  in  its  money  use, 
not  in  the  fiat  of  the  government. 

3.  A  sound  theory  of  paper  money  makes  it  a  special  case  Theoretical 
of  monopoly  value.  It  has  been  seen  that  the  power  of  almost  J^  ^good 
every  monopoly  over  price  is  relative,  not  absolute.  As  the  papermoney 
power  of  a  great  private  corporation  over  the  price  of  its 
product  is  limited,  so  is  that  of  the  government  over  the  value 
of  political  money.  The  money  use  is  the  source  of  value  to 
the  paper  notes.  Business  conditions  remaining  unchanged, 
the  limit  of  possible  issue  without  depreciation  is  the  number 
of  units  in  circulation  before  the  paper  money  was  issued,  the 
saturation  point  of  full-weight  and  full-value  coins.  Be- 
cause governments  generally  have  not  stopped  at  that  point, 
paper  money  has  depreciated.  Popular  error  and  selfish 
interests  force  legislation  beyond  the  reasonable  limit.  In  a 
few  cases  only  have  there  been  public  integrity  and  courage 
enough  to  retrace  the  steps  before  great  harm  resulted.  It 
is  principally  this  lack  of  control  that  prevents  paper  money 
from  being  a  good  circulating  medium. 


452  TOKEN  AND  PAPEE  MONEY  [CH.  46 

influence  of  It  is  sometimes  said  that  government  cannot  affect  value 
in  any  way,  but  it  can  do  so  in  many  ways.  Certainly  one 
of  the  most  remarkable  is  by  the  use  of  its  monopoly  power 
over  the  medium  of  exchange,  whereby  it  can,  under  certain 
conditions,  cause  a  piece  of  paper  to  have  the  value  of  a 
piece  of  gold.  Thereby  at  the  same  time  it  affects  the  inter- 
ests of  nearly  every  member  of  society,  raising  or  lowering 
the  value  of  many  kinds  of  property,  and  of  many  incomes. 


CHAPTER  47 
THE    STANDARD    OF    DEFERRED    PAYMENTS 

§  I.      FUNCTION   OP  THE   STANDARD 

1.  The  standard  of  deferred  payments  is  the  thing  of  Definition 
value  in  which,by  the  law  or  by  contract, the  amount  of  a  debt  g^^rd 
is  expressed.    A  credit  transaction  is  a  lengthened  exchange ; 

one  party  fulfils  his  part  of  the  contract,  the  other  party 
promises  to  give  an  equivalent  at  a  later  date.  The  equiva- 
lent may  be  in  any  kind  of  goods ;  for  example,  in  barter  one 
may  part  with  a  horse  on  the  promise  of  a  cow  to  be  received 
later;  or  a  small  horse  on  the  promise  of  a  large  one;  or  a 
flock  of  sheep  on  the  promise  of  its  return  at  the  end  of  the 
year  with  a  part  of  the  increase  of  the  flock.  A  simple 
standard  in  which  to  express  the  debt  is  the  thing  borrowed, 
as  horse,  sheep,  wheat,  house,  etc.  This  involves  the  use  of 
the  renting  contract.  ^  Again,  the  thing  to  which  the  value 
of  debts  is  referred  may  be  a  thing  quite  different  from  the 
goods  borrowed,  and  with  the  growth  of  the  money  economy 
and  the  use  of  the  interest  contract,  money  comes  more  and 
more  to  be  used  as  the  standard.  The  parties  express  the 
debt  in  terms  of  the  standard  unit  established  by  law. 

2.  The  importance  of  the  standard  of  deferred  payments  increasing 
increases  with  the  use  of  money  and  with  the  amount  of  out-  J^res"?6 
standing  debts.    Until  the  use  of  money  develops,  the  use  of  contract 
credit  is  difficult  and  limited ;  it  becomes  easy  when  the  value 

of  "all  things  is  expressed  in  terms  of  a  common  circulating 
medium.  If  all  business  were  done  for  cash  there  would  be 
no  great  interests  affected  when  a  change  in  the  value  of 

453 


454  THE   STANDARD  OF  DEFERRED  PAYMENTS        [CH.  47 

money  occurred.  Every  dollar  would  change  in  value  in  the 
hands  of  the  holder,  but  there  the  effect  would  cease.  But  the 
volume  of  outstanding  debts  expressed  in  terms  of  money  now 
exceeds  many  fold  the  total  value  of  the  circulating  medium. 
The  value  of  all  these  debts  changes  in  the  same  proportion 
as  does  that  of  the  standard  unit  of  money;  when  this  is 
cheapened  either  by  law  or  as  a  result  of  increasing  supplies, 
a  creditor  to  whom  a  thousand  dollars  are  due  loses  the  same 
as  if  he  had  a  thousand  metal  dollars  locked  up  in  a  strong- 
chest. 

Greateffects       Outstanding  contract  debts  may  be  roughly  divided  into 
of  money       three  classes :  short-time  loans,  running  less  than  a  year; 

cnanges 

medium-time,  running  from  one  to  five  years ;  long-time,  run- 
ning over  five  years.  Fluctuations  are  rarely  rapid  and  great 
enough  to  affect  appreciably  the  debtors  and  creditors  in  the 
case  of  short-time  loans.  The  results  are  greater  in  the 
case  of  long-time  loans,  such  as  national,  state,  and  city  debts, 
bonds  of  corporations,  mortgages  given  by  farmers  on  their 
land  or  by  owners  of  city  real  estate.  A  multitude  of  inter- 
ests are  affected  by  a  change  in  the  value  of  money.  When, 
as  in  the  years  1873-96,  money  gains  in  purchasing  power 
(prices  fall)  receivers  of  fixed  incomes  are  gainers.  When, 
as  in  the  years  1896-1903,  the  value  of  money  falls,  the  rev- 
enues from  educational  and  charitable  endowments,  the 
salaries  of  public  officials,  and  all  fixed  incomes,  lose  pur- 
chasing power.  In  a  capitalistic  age,  therefore,  almost  every 
individual  is  affected  in  some  way  by  a  change  in  the  value 
of  money.  In  most  cases  the  change  escapes  recognition; 
people  do  not  trace  out  the  relation  that  an  industrial  change 
bears  to  their  own  interests.  In  a  few  notable  cases,  how- 
ever, the  change  has  been  revolutionary  as  in  the  period 
following  the  discovery  of  America,  when  the  feudal  dues 
had  come  to  be  expressed  in  terms  of  money  instead  of 
labor  services.  In  modern  times,  the  mass  of  debts  being 
greater  than  ever  before,  such  changes  as  those  following 
the  discovery  of  gold  in  California  or  the  decrease  in  gold 


§1]  FUNCTION  OF   THE   STANDARD  455 

production  between  1873  and  1890  have  the  gravest  economic 
results. 

3.  The  best  standards  of  deferred  payments  available—   Merits  of 
the  precious  metals,  gold  and  silver— are  still  imperfect.    The  *JJj^£  o 
good  that  is  most  convenient  as  a  standard  of  deferred  pay-  standards 
ments  is  the  one  used  as  money.    Gold  to-day  is  constantly  ex- 
pressing the  value  of  all  other  things.    Borrowers  prefer  to 

make  loans  in  the  form  of  the  general  medium  of  exchange. 
From  the  usage  of  speaking  of  all  things  in  terms  of  money, 
the  false  idea  arises  that  the  value  of  other  things  changes, 
but  that  the  value  of  gold  is  always  the  same.  Money  is  no 
such  a  fixed  objective  standard  as  a  foot-rule  or  a  pound 
weight.  The  value  of  gold  rests  on  the  estimates  made  by 
men,  and  is  constantly  changing  according  to  conditions.  A 
fixed  objective  standard  of  value  is  not  possible  of  attain- 
ment. The  value  of  the  precious  metals  is  stable  as  com- 
pared with  most  things.  The  current  new  supply  is  com- 
paratively regular.  For  generations  at  a  time  there  may  be 
no  radical  changes  in  the  output  of  gold  and  silver;  For 
centuries  there  was  no  change  in  the  methods  of  extraction. 
Recent  inventions,  however,  have  considerably  altered  these 
conditions.  The  nature  of  the  use  of  gold  and  silver,  like- 
wise, is  such  as  to  make  the  demand  for  them,  under  ordinary 
conditions,  most  stable.  The  precious  metals  are  but  slowly 
worn  out;  only  a  portion  of  the  annual  output  is  used  in 
the  arts ;  there  is,  therefore,  a  large  reservoir  into  which  flows 
steadily  a  small  stream ;  the  existing  stock  is  twenty  or  thirty 
times  the  annual  output.  Yet  the  value  of  the  standard 
metals  is  never  quite  stable,  and  sometimes  several  influences 
combine,  as  in  the  last  century,  to  affect  their  value  greatly 
and  suddenly. 

4.  Various  ideals  for  a  standard  of  deferred  payments  various 
have  been  suggested— as  return  of  equal  enjoyment,  of  equal  JJ^^J 
sacrifice,  social  expediency;  and  various  standards— as  labor, 
commodities,  and  the  tabular  standard.    The  ideal  standard 

of  deferred  payments  is  one  that  will  insure  justice  be- 


456  THE   STANDARD  OF  DEFERRED  PAYMENTS        [CH.  47 


Sacrifice 


Labor 


tween  borrower  and  lender.  Different  views  have  been  taken 
as  to  what  constitutes  justice  in  this  matter.  The  suggestion 
is  attractive  that  the  sum  when  returned  should  represent  the 
Enjoyment  same  amount  of  enjoyment  as  it  did  when  it  was  borrowed. 
Such  a  standard  is  impossible  of  realization  in  any  general 
way,  for  men's  circumstances  are  constantly  changing.  To 
insure  even  to  the  average  man  the  same  amount  of  enjoy- 
ment is  only  roughly  possible.  The  same  goods  do  not  afford 
the  same  enjoyment  when  conditions  have  changed.  An- 
other suggestion  is  that  the  goods  returned  should  represent 
the  same  sacrifice  as  those  loaned.  Here  again  the  difficulty 
is  in  the  lack  of  an  objective  standard.  Whose  sacri- 
fice? That  of  the  lender,  who  may  be  rich,  or  that  of  the 
borrower,  who  may  be  poor  ?  Some  have  supposed  the  condi- 
tions of  equal  sacrifice  were  met  by  the  labor  standard, 
according  to  which  the  sum  returned  should  purchase  the 
same  number  of  days  of  labor  as  when  borrowed.  But  what 
kind  of  labor  is  to  be  taken,  that  of  the  lender  or  that  of  the 
borrower,  or  that  of  some  one  else?  Labor  is  of  many 
different  qualities,  which  can  be  exactly  compared  only 
through  their  objective  value  in  terms  of  some  one  good. 
The  ideal  of  equal  enjoyment  has  been  supposed  to  be 
realized  by  the  tabular  standard,  which  consists  of  a  number 
of  leading  commodities  in  fixed  proportions.  The  money 
returned  is  to  be  enough  to  purchase  the  same  goods  at  the 
expiration  as  at  the  making  of  the  loan,  and  thus  may  be 
a  larger  or  smaller  sum  than  was  borrowed.  While  this  does 
not,  as  is  sometimes  claimed,  insure  equality  of  enjoyment, 
it  averages  the  fluctuations  of  many  goods,  and  thus  prevents 
great  extremes.  This  standard  has  been  favored  by  notable 
monetary  authorities,  but  the  difficulties  of  its  practical  ap- 
plication are  prohibitive. 

It  must  be  recognized  that  any  possible  concrete  standard 
of  deferred  payments  will  sometimes  work  hardship  to  indi- 
viduals. The  best  average  results  for  justice  and  social 
welfare  will  be  secured  by  measuring  debts  in  goods  that 


Tabular 
standard 


§11]  INTERNATIONAL  BIMETALLISM  457 

change  least  often,  least  rapidly,  and  in  the  least  unpredict- 
able manner.  Gold  thus  far  has  proved  itself  worthy  to  serve 
as  the  standard. 


§  II.       INTERNATIONAL  BIMETALLISM 

1.  The  fall  of  prices  in  1873  and  the  following  years  Examples 
meant  a  great  change  in  the  standard  of  deferred  payments.   of  Price 
The  monetary  changes  following  the  discovery  of  America 

were  due  to  the  inflow  to  Europe  of  great  quantities  of  silver 
taken  by  force  from  the  native  American  rulers,  and  from 
the  rich  mines.  Silver,  at  that  time  throughout  Europe  the 
main  standard  of  deferred  payments,  was  thus  greatly  low- 
ered in  value.  This  change  lightened  all  outstanding  obliga- 
tions, lowered  the  money  rents  of  the  peasants,  and  the  cus- 
tomary dues  of  labor  wherever  they  had  come  to  be  expressed 
in  money  form.  By  the  third  quarter  of  the  nineteenth 
century  gold  had  become  in  Europe  and  America  the  main 
standard,  though  silver  still  served  as  such  in  some  coun- 
tries. The  output  of  gold  in  1849-57  caused  the  greatest 
money  inflation  that  has  occurred  since  the  sixteenth  century, 
favoring  in  a  similar  manner  the  debtor  classes.  The  substi- 
tution of  gold  for  silver  by  some  countries  at  that  time,  by 
making  a  great  additional  market  for  gold,  helped  in  some 
degree  to  check  the  fall  in  its  value. 

The  decline  in  the  output  of  gold  was  a  change  of  the  oppo-  The  recent 
site  character,  causing  a  fall  of  prices  and  increasing  the  bur-  gJ^faUof 
den  of  debts.    From  1873  to  1896  there  was  almost  constant 
decline  of  the  prosperity  of  the  agricultural  classes,  due  in 
part  to  this  money  influence,  but  in  part  to  influences  which 
cannot  be  dwelt  upon  here,  as  they  had  nothing  to  do  with 
the  money  question.     There  was  complaint,  agitation,  and 
demand  for  relief  on  the  part  of  many  interests  in  France, 
Germany,  England,  and  the  United  States. 

2.  Bimetallism,  the  use  of  two  metals  as  standard  moneys,  Bimetallism 
was  the  remedy  proposed.     Bimetallism  is  legally  complete  defined 


458  THE  STANDARD  OF  DEFERRED  PAYMENTS        [CH.  47 

when  both  metals  are  admitted  to  the  mints  for  free  coinage 
at  an  established  ratio  of  weight;  it  is  halting  or  limping 
when  one  of  the  metals  is  not  freely  coined.  Bimetallism 
may  be  legally  authorized,  but  not  actually  working.  As 
soon  as  the  legal  ratio  varies  appreciably  from  the  market 
value,  only  one  of  the  metals  will  in  fact  be  brought  to  the 
mint.  National  bimetallism  is  confined  to  a  single  country, 
as  that  in  the  United  States  before  the  Civil  War,  or  in 
France  before  1867.  International  bimetallism  is  an  agree- 
ment among  several  nations  to  use  two  metals  on  the  same 
terms,  the  only  case  in  history  being  that  of  the  Latin  Union, 
which  included  France,  Italy,  Switzerland,  and  other  coun- 
tries. The  discussion  of  international  bimetallism  in  recent 
years  has  been  on  the  proposal  to  make  a  much  larger  league 
of  states  than  the  Latin  Union,  embracing  all  the  leading 
countries. 

objectofin-       3.     The  main  object  of  international  bimetallism  is  to 
temationai    prevent  the  fluctuations  of  the  standard  of  deferred  pay- 

D  imc  td.ll  i  s  m 

ments.  Commercial  dealings  between  gold-using  and  silver- 
using  countries  are  of  great  magnitude,  and  the  use  of  differ- 
ent standards  leads  to  many  difficulties.  Fluctuations  in  the 
ratio  of  the  two  metals  occasion  much  uncertainty  and  loss 
to  individual  traders.  The  rise  in  the  value  of  gold  meant  an 
increase  in  the  burden  of  the  public  debts  of  silver-using 
countries  which  collect  their  revenues  in  silver,  but  which 
must  pay  their  debts,  principal  and  interest,  in  gold, 
its  theory  The  theory  of  bimetallism  is  that  the  government  can  act 
on  the  value  of  the  two  metals  through  the  principle  of 
substitution.  The  metal  tending  to  become  dearer  will  not 
be  coined,  the  other  will  be  coined  in  greater  quantities.  The 
degree  of  influence  that  can  thus  be  exerted  on  the  value  of 
the  two  metals  depends  on  the  size  of  the  reservoir  of  the 
metal  that  is  rising  in  price.  When  it  all  leaves  circulation, 
the  law  on  the  statute  book  permitting  it  to  be  coined  becomes 
a  mere  sounding  phrase.  In  such  a  case  there  is  bimetallism 
de  jure,  but  monometallism  de  facto.  The  greater  the  league 


§111]  THE  FREE-SILVER  MOVEMENT   IN  AMERICA  459 

of  states,  the  greater  is  the  likelihood  that  the  scheme  will 
work.  The  economic  theory  of  bimetallism  was  recognized 
by  a  majority  of  economists  to  be  abstractly  sound,  but  the 
political  difficulties  in  the  way  of  international  agreements 
are  great,  and  have  proved  to  be  insurmountable. 

§  III.      THE   FREE-SILVER   MOVEMENT   IN   AMERICA 

1.  International  bimetallism,  despite  many  efforts,  failed  conditions 
of  adoption.    This  brief  proposition  sums  up  the  history  of  leadin«to 

the  dcnicin  d 

the  movement,  from  1878  to  1892,  to  form  a  league  of  states  forfree- 
and  an  agreement  for  international  bimetallism.  Interna-  silver 
tional  conferences  were  held,  and  taken  part  in  by  the  lead- 
ing financiers  of  the  world.  France  at  first  favored  the 
policy,  and  the  United  States  was  always  foremost  in  advo- 
cating it,  while  England  in  the  main  was  opposed.  Some  of 
the  advocates  of  bimetallism  argued  that  the  fall  of  prices 
was  due  not  alone  to  economic  forces,  but  also  to  a  money  con- 
spiracy which  had  influenced  legislation  to  introduce  and 
continue  the  gold  standard.  This,  of  course,  was  stren- 
uously denied.  It  is  true  that  the  commercial  classes  found 
gold  the  form  of  money  most  suitable  to  large  business, 
and  no  doubt  class  interests  entered  into  the  question  in  some 
measure.  The  difficulties  of  the  debtor  class  in  America  were 
peculiarly  great,  owing  to  the  inflated  paper  currency,  from 
1862  to  1879,  which  had  made  our  conditions  quite  abnormal. 
In  the  period  of  speculation  following  the  Civil  War  an 
enormous  mass  of  debts  had  been  accumulated.  The  hopes 
of  thousands  of  tillers  of  the  soil  suffering  from  a  fall  in 
prices,  and  of  the  great  debtor  class,  clamoring  for  relief, 
were  centered  upon  the  success  of  this  movement.  Banking 
and  other  large  business  interests  in  general  opposed  it. 

2.  The  plan  of  the  free-silver  advocates  was  to  legalize  Purpose  of 
national  bimetallism  in  the  United  States  at  a  ratio  between  ^^ee" 
gold  and  silver  very  different  from  the  market  ratio.     Gold  movement 
had  become,   long  before   1860,   the  real   standard  of   our 


460  THE   STANDARD  OF  DEFERRED  PAYMENTS        [CH.  47 

money  system,  and  after  1873  it  was  the  only  metal  admitted 
to  free  coinage.  Silver,  little  by  little,  was  losing  purchasing 
power  in  terms  of  gold,  until  from  being  worth,  in  1873,  one 
sixteenth  as  much,  ounce  for  ounce,  it  became,  in  1896,  worth 
but  one  thirtieth  as  much  as  gold.  It  must  be  recognized 
that  the  power  of  silver  to  purchase  general  commodities  fell 
much  less  than  the  change  in  its  ratio  to  gold  would  indicate, 
gold  having  risen  in  terms  of  most  other  goods  as  well  as  of 
silver.  Nevertheless,  the  proposal  to  open  the  mints  to  free 
silver  at  sixteen  to  one  in  the  year  1896  meant  a  sudden 
and  marked  cheapening  of  money.  The  prime  purpose  was 
to  lighten  the  burden  of  debts  by  making  the  standard  of 
deferred  payments  cheaper.  It  was  at  first  a  debtors'  move- 
ment, but  to  succeed  it  had  to  enlist  the  support  of  other 
large  classes  of  voters.  And  thus,  by  force  of  political 
necessity,  but  doubtless  in  large  part  naively,  it  developed 
into  the  more  sweeping  theory  that  wages,  welfare,  and  pros- 
perity called  for  a  larger  supply  of  money  independently 
of  the  effect  on  debts. 

The  free-  In  its  extreme  form  the  free-silver  plan  was  a  fiat  scheme, 
siivertheory  £QY  gome  of  fts  supporters  believed  that  by  the  mere  passage 
of  the  law  the  two  metals  could  be  made  to  bear  to  each  other 
any  ratio  desired.  But  its  most  intelligent  and  high-minded 
advocates  (who  were  moved  to  its  support  by  a  sincere  sym- 
pathy and  concern  for  the  distressed  agriculturalists)  recog- 
nized fully  that  the  force  of  the  law  was  limited  by  economic 
conditions.  The  extreme  opponents  of  the  plan,  ignoring 
the  evident  fact  that  the  adoption  of  a  metal  as  a  standard 
money  is  one  of  the  most  essential  of  the  market  conditions, 
denied  that  government  action  could  in  any  way  affect  the 
value.  Most  of  the  arguments  presented  on  either  side  in  the 
political  campaigns  showed  little  evidence  of  a  sound  theory 
of  money.  The  victory  of  the  gold  standard  in  1896  and 
1900,  it  would  seem,  was  due  more  to  the  well-founded  fear 
that  a  sudden  change  of  the  money  standard  would  cause  a 
panic,  than  to  a  thorough  understanding  of  the  question. 


§111]  THE  FREE-SILVER  MOVEMENT   IN   AMERICA  461 

3.  The  increase  of  the  gold  output  has  for  the  present  increase  of 
checked  the  fall  of  prices.  Before  1890,  for  a  number  of  Auction0" 
years,  the  average  output  of  gold  was  shrinking  till  it  reached 
a  scant  hundred  million  per  year.  At  the  same  time,  nations 
which  recently  had  gone  over  to  the  gold  standard  were 
striving  to  secure  large  stocks  for  their  banks  and  general 
circulation,  and  those  great  reservoirs,  as  a  result,  became 
better  filled  than  they  ever  were  before.  After  the  opening 
of  new  gold-yielding  territory  in  South  Africa  and  in 
the  Klondike,  the  annual  output  of  gold  became  greater 
than  it  had  ever  been,  being  at  the  opening  of  the  South 
African  War  in  1898  nearly  three  times  that  of  ten  years 
earlier.  The  present  methods  of  extracting  gold  resemble 
those  of  fifty  years  ago  as  civilized  industry  resembles  that 
of  savages.  Intricate  machinery  has  taken  the  place  of  crude 
tools,  chemical  processes  have  been  introduced,  and  the  prin- 
cipal product  results  from  the  regular  and  certain  working  of 
deep  mines  rather  than  from  chance  surface  discoveries. 
Great  masses  of  debris  can  now  be  reworked  profitably.  In 
many  parts  of  the  world  are  enormous  deposits  of  low-grade 
ores,  before  useless,  that  can  be  worked  economically  by 
present  methods.  For  a  generation  at  least  the  world's 
supply  of  gold  is  likely  to  continue  larger  than  ever  before 
in  history,  and  prices  in  terms  of  gold  probably  will  rise. 

Though  no  change  seems  likely  or  possible  at  the  present  Rising 
time,  the  free-silver  advocate  has  been  justified  by  events  tmporary 
against  those  gold  advocates  who  said  that  the  amount  of  solution 
money  has  nothing  to  do  with  prices.    Prices  have  gone  up  as 
gold  has  increased.     The  free-silver  advocates  have  gotten 
what  they  wanted  through  a  change  for  which  neither  party 
can  claim  the  credit.     Yet  the  present  situation  is  unsatis- 
factory and  undeveloped.     A  standard  better  than  a  single 
metal,  more  stable  than  a  single  commodity,  is  desirable  if  it 
can  be  found.    The  money  question  must  arise  again  and  in 
a  new  form  before  many  years.    The  difficulty  has  not  been 
finally  settled ;  it  is  but  postponed. 


CHAPTER  48 
BANKING   AND    CREDIT 

§  I.      FUNCTIONS  OF  A  BANK 

Theessen-  1.  A  bank  is  a  business  whose  income  is  derived  chiefly 
from  lending  its  promises  to  pay.  Banks  have  passed 
through  many  changes  in  the  past  three  centuries.  Originat- 
ing on  the  street  corner  for  exchange  of  money,  they  have 
evolved  into  great  institutions  of  many  forms,  and  per- 
forming many  functions.  The  definition  seems  paradoxical, 
but  it  expresses  what  in  modern  thought  is  the  essential 
feature  of  a  bank:  the  lending  of  its  credit.  A  reserve  of 
money  is  needed  by  the  man  of  business.  But  for  the  banks 
each  man  would  have  to  keep  his  reserve  in  his  own  till. 
Except  the  small  sum  needed  for  current  uses,  a  bank  can 
keep  this  reserve  more  economically  than  individuals  can. 
It  has  the  advantages  of  large  production  similar  to  those  of 
a  large  factory.  The  process  of  lending  credit  is  called 
deposit  and  discount.  It  grew  out  of  the  deposit  of  actual 
money  for  safe  keeping  and  the  loaning  to  borrowers  by  the 
method  of  discounting  their  notes.  The  term  now  has  a 
somewhat  different  meaning,  for  a  merchant  may  obtain  a 
deposit  to-day  without  putting  any  money  in  the  bank.  He 
gets  the  bank  to  discount  his  notes  or  collateral  security,  and 
to  enter  the  sum  to  his  credit  as  a  deposit.  He  becomes  a 
depositor  by  borrowing,  not  by  lending  to  the  bank.  The  sum 
is  under  the  borrower 's  control ;  he  can  check  it  out  when  he 
wishes;  but  he  usually  keeps  a  certain  balance  to  his  credit. 
The  bank's  gain  is  larger  than  ordinary  interest,  because  it 

462 


§1]  FUNCTIONS   OF  A  BANK  463 

gets  a  discount  on  the  large  sums  left  in  its  possession.  The 
bank  increases  its  funds  also  by  attracting  deposits  from 
those  who  do  not  care  to  borrow. 

2.  Functions  not  essential  to  banking  are  ordinary  money-   other 
lending,  money -changing,  exchange  to  distant  points,  safe  functions 
deposit,  and  issue  of  bank-notes.     Banks  often  lend  in  the  performed 
ordinary  way,  allowing  borrowers  to  draw  the  money  out  at 

once,  but  this  is  not  the  business  they  prefer.  Many  indi- 
viduals and  corporations,  such  as  endowed  charities,  colleges, 
insurance  companies,  lend  great  sums  of  their  own  money 
without  thereby  partaking  in  any  degree  of  the  peculiar 
character  of  banking.  Money-changing  (the  exchange  of 
coins  of  different  countries)  is  done  by  banks,  but  likewise 
by  many  other  agencies  not  sharing  the  essential  banking 
character.  Foreign  and  domestic  exchange  is  the  issue  and 
cashing  of  "drafts"  for  money  payments  between  distant 
places.  Most  banks  are  well  fitted  to  perform  this  function, 
but  some  banks  do  not  undertake  it,  and  it  is  performed  also 
by  some  business  houses  that  are  not  banks.  Safe  deposit 
is  the  keeping  of  things  to  be  returned  in  identical  form,  as 
silverware,  notes,  and  papers.  By  banks  in  small  towns 
this  is  sometimes  done  freely,  sometimes  for  a  slight  charge ; 
but  in  large  cities  safe-deposit  vaults  are  generally  quite  un- 
connected with  banks.  Even  bank-note  issue  is  not  essential 
to  banking;  most  banks  in  the  United  States  issue  no  notes, 
others  issue  very  few.  All  these  functions  may  be  united 
under  one  management,  but  the  essential  banking  function 
is  deposit  and  discount. 

3.  The  inconu  of  banks  is  derived  from  discountsf  inter-  sources  of 
est  on  their  own  capital,  charges  for  exchange  and  collection, 

rents  on  investments,  and  profit  from,  the  loan  of  their  bank- 
notes. The  income  of  banks  is  drawn  from  different  sources, 
according  to  the  size  of  the  community,  and  the  nature  of  the 
banks.  While  in  the  villages  and  smaller  cities  they  perform 
a  number  of  functions,  in  the  larger  cities  they  usually 
specialize  in  a  far  greater  degree.  Like  every  other  enter- 


464 


BANKING  AND   CREDIT 


[CH.  48 


Productive 
services  of 
banks 


prise,  a  bank  must  start  in  business  with  some  paid-up  capital 
as  a  guarantee  of  credit.  Further  security  is  afforded  by  the 
limited  liability  of  shareholders  for  losses,  in  proportion  to 
their  capital  stock.  The  same  amount  of  money  could  be 
loaned  with  less  trouble  and  more  cheaply  without  starting 
a  bank,  but  used  as  a  banking  capital  a  part  of  it  can  be 
loaned  while  still  serving  to  attract  money  deposits.  Charges 
to  smaller  customers  for  exchange  are  a  source  of  income  to 
some  banks,  but  in  many  cases  this  service  is  freely  per- 
formed for  regular  customers  and  becomes  a  considerable 
expense.  Banks  make  few  investments  in  real  estate  or  other 
physical  property;  it  is,  in  fact,  their  duty  to  keep  out  of 
ordinary  enterprises,  but  they  are  forced  sometimes  to  take 
for  unpaid  debts  things  that  have  been  held  as  security. 
Profits  on  bank-notes  have  at  times  been  the  main,  possibly 
the  sole,  motive  for  starting  banks;  but  that  is  not  the  case 
to-day  when  the  right  of  issue  is  so  strictly  limited. 

4.  Banks  are  productive  economic  agents  performing  im- 
portant industrial  services.  False  ideas  have  long  been  en- 
tertained about  the  magic  power  of  banks  to  produce  wealth 
from  nothing.  To  many,  banks  are  a  mystery  much  like 
paper  money.  Their  opponents  sometimes  have  pictured 
them  as  vampires  fattening  on  the  blood  of  industry.  That 
they  have  shown  abuses  at  times  is  undeniable,  but,  like 
other  economic  agents,  they  are  to  be  judged  by  their  net 
efficiency.  The  bank  is  a  tool  performing  services  similar 
to  those  of  money.  For  some  purposes  money  is  an  awkward 
and  costly  agent  in  comparison  with  banks.  For  remitting 
payments  from  New  York  to  San  Francisco  or  Hong  Kong, 
money  is  a  medieval  device.  Money  can  more  safely  be  en- 
trusted to  a  bank  than  to  a  strong  chest  in  one's  own  house. 
The  man  who  refused  to  make  use  of  banks  in  this  day  would 
isolate  himself  economically,  and  would  soon  find  himself 
out  of  any  but  the  smallest  business.  He  could  no  more  get 
along  without  the  banks  than  without  the  post,  the  telegraph, 
or  the  telephone. 


$H1  TYPICAL  BANK  MONEY  465 

The  gathering  of  loanable  funds  by  the  banks,  making  The  bank  as 
them  available  at  once,  reduces  hoarding,  makes  money  move 
more  rapidly,  and  creates  a  central  market  between  borrowers  vice 
and  lenders  for  the  sale  of  credit.  While  not  creating  more 
physical  wealth  directly,  it  adds  to  the  efficiency  of  wealth; 
it  oils  the  bearings  of  the  industrial  machine.  To  abolish 
banks  would  be  to  destroy  labor-saving  machinery.  Banks 
perform  incidentally  a  further  service  in  developing  better 
business  methods  in  the  community.  In  supplying  credit  to 
active  business,  banks  are  constantly  passing  judgment  on 
the  collateral  security  presented  to  them  and  on  the  solidity 
of  the  enterprises  that  are  seeking  support.  They  enforce 
promptness  and  exactitude  in  business  dealings. 

Because  in  their  public  nature  banks  are  very  analogous 
to  money,  they  have  always  been  looked  upon  as  properly 
subject  to  more  supervision  than  most  private  business,  and 
government  has  always  exercised  a  considerable  measure  of 
control  over  them,  sometimes  for  good,  sometimes  for  evil. 

§  II.       TYPICAL  BANK  MONEY 

1.  Typical  bank  money  consists  of  notes  issued  by  banks  Nature  of 
on  the  credit  of  their  general  assets,  without  special  regula- 
tion by  law.  As  no  two  leading  countries  have  quite  the  same 
system  of  bank-notes,  the  subject  is  a  difficult  one.  It  is 
well  to  begin,  therefore,  with  a  clear  conception  of  typical 
bank  money,  unregulated  by  government.  Such  a  form  of 
note  is  one  with  which  few  now  living  in  the  United  States 
have  had  any  experience,  as  the  present  national  bank-notes 
differ  in  essential  ways  from  the  typical  form.  Typical 
bank-notes  are  notes  issued  by  banks  as  a  means  of  loaning 
their  credit.  The  borrower,  instead  of  receiving  a  credit 
balance  at  the  bank  subject  to  check,  gets  notes  which  he 
hands  on  to  other  men.  These  notes  are  returned  for  re- 
demption to  the  issuing  bank  as  soon  as  any  one  wishes 
specie  in  their  stead.  The  limit  of  the  issue  of  such  notes 

30 


466 


BANKING   AND  CREDIT 


1CR  48 


Bank-notes 
viewed  as 
commercial 
paper 


is  the  need  of  the  community  for  that  form  of  money,  and 
if  they  are  promptly  redeemed  in  gold  on  demand,  they  never 
can  exceed  that  amount.  A  holder  of  a  note  (in  the  absence 
of  special  regulations)  has  the  same  claim  on  the  bank  that 
a  depositor  has.  As  it  is  to  the  interest  of  the  bank  to  keep 
in  circulation  as  many  notes  as  possible,  there  is  a  tempta- 
tion to  abuse  the  power  of  note-issue,  to  which  many  banks 
yielded  in  the  period  of  so-called  " wild-cat  banking"  before 
the  Civil  War. 

2.  Bank-notes  are  viewed  by  some  as  a  form  of  commer- 
cial credit.     Typical  bank-notes  are  not  legal  tender,  and 
every  one  has  the  legal  right  to  take  or  refuse  them  as  he 
pleases.     It  is  therefore  said  by  some  that  bank-note  issue 
is  of  no  special  concern  to  the  state,  that  it  can  safely  be 
left  to  individual  self-interest.    It  is  said  that  if  one  has  little 
faith  hr  a  note,  he  may  refuse  to  accept  it.    But  in  reality 
every  one  is  compelled  to  take  the  money  that  is  current. 
The  average  citizen  cannot  know  the  credit  of  distant  banks, 
and  thus  has  not  the  same  power  of  judging  wisely  in  taking 
bank-notes  that  he  has  in  making  deposits  in  the  bank  of 
his  own  neighborhood.     Between  bank-notes  and  ordinary 
promissory  notes,  there  are  other  differences  of  a   nature 
pretty  generally  recognized.     Bank-notes  pass  without  en- 
dorsement and  thus  depend  on  the  credit  of  the  bank  alone, 
not  like  checks,   on  the   credit  of  the  person  from  whom 
received.    They  yield  no  interest  to  the  holder.    They  are  in- 
tended to  be  used  as  money  and  are  so  used.     Thus  they 
come  near  to  paper  money  in  their  nature,  and  the  banks  are 
near  to  exercising  the  right  of  coinage. 

3.  By  others,  bank-notes  are  considered  to  be  almost  iden- 
tical with  government  paper  money.     Some  opponents  of 
bank-note  issue  declare  that  it  is  a  usurpation  of  the  prerog- 
atives of  government,  and  that  no  power  but  the  sovereign 
state  should  issue  money.     While  many  in  America  to-day 
hold  this  view,  the  comparison  probably  is  false  and  strained. 
Typical  bank-notes,  unlike  inconvertible  paper  money,  de~ 


*"J  TYPICAL   BANK  MONEY  467 

>end  for  their  value  on  the  credit  of  the  bank,  not  on  their 
egal-tender  quality  and  on  political  power.     They  must  be 
redeemed  on  penalty  of  insolvency;  government  notes  need 
not  be,  and  yet  will  circulate  at  par  if  properly  limited. 

While  these  differences  mark  off  government  paper  money 
pretty  sharply  from  typical  bank-notes,  it  must  be  noted 
that  in  many  cases  actual  bank-note  issues  have  been  far 
from  this  typical  form.  In  the  days  of  "wild-cat"  banking, 
bank-notes  were  issued  in  excess  and  fell  below  par,  yet  the 
man  in  a  Western  community  who  dared  to  ask  the  bank  to 
redeem  the  notes  in  specie  was  not  only  frowned  on  by  the 
bank,  but  condemned  by  the  public,  which  felt  that  business 
was  endangered  by  such  a  demand.  Redemption  on  demand 
would  have  required  a  reduction  of  the  amount  of  money  in 
circulation  and  would  have  caused  a  fall  in  prices.  Inflation 
of  the  bank  currency  went  on  with  results  almost  identical 
with  those  following  an  excessive  issue  of  government  paper 
money.  Not  formal  law  but  public  opinion  made  such  bank- 
notes essentially*  political  money. 

4.  The  public  nature  of  bank  money  has  led  to  many  Policy  of 
forms  of  public  regulation  of  their  issues.  Bank-notes  thus  public  regu' 
stand  midway  in  their  economic  nature  between  political  bank-notes 
money  and  private  notes,  sharing  something  of  the  character 
of  each.  An  extreme  analogy  in  either  direction  is  mislead- 
ing. It  is  of  great  social  importance  that  the  circulating 
medium  should  be  reliable.  The  least  possible  amount  of  the 
citizen's  energy  and  thought  should  be  required  to  decide 
whether  the  money  is  good  or  bad.  Nevertheless,  those  op- 
posed to  state  interference  in  industry  declare  that  if  the 
citizen  is  not  left  to  look  out  for  himself,  the  growth  of 
stupidity  will  be  encouraged;  and  they  say  that  it  is  no 
more  essential  for  the  state  to  guarantee  the  quality  of  bank- 
notes than  the  quality  of  woolen  cloth  or  of  sugar.  Few, 
however,  take  so  extreme  a  view,  and  it  is  generally  held 
that  it  is  a  function  of  the  state  to  insure  in  a  greater  or 
less  degree  the  quality  of  the  money  in  circulation.  The 


', 


468  BANKING  AND  CREDIT  [CH.48 

actual  bank-notes  of  the  leading  countries  are  thus  of  many 
varieties.  The  Canadian  notes  are  the  most  nearly  typical 
bank-notes  issued  to-day ;  those  of  Germany  come  next,  while 
those  of  the  United  States  have  little  of  the  typical  character. 

§  III.       BANKS    OF    THE    UNITED    STATES    TO-DAY 

Forms  of  1.     The  three  forms  of  banks  in  the  United  States  are  pri- 

uritednt  '  va*e>  statef  and  national.  Any  one  with  a  little  capital  may 
states  become  a  private  banker.  There  are  "curbstone  brokers" 
in  almost  every  town,  and  some  of  the  great  financial  houses 
are  private  banks.  But  the  law  will  not  allow  this  to  go  very 
far.  Some  states  will  not  allow  a  man  to  put  up  a  sign 
announcing  himself  as  a  banker  unless  he  complies  with 
certain  banking  laws.  In  some  states  even  private  banks  are 
subjected  to  the  same  inspection  as  the  state  banks  and  are 
required  to  make  the  same  reports  to  the  state  officials. 
State  banks  are  those  organized  under  special  state  banking 
laws.  They  are  usually  subject  to  inspection  by  state-bank 
commissioners,  must  make  regular  reports,  and  are  required 
to  comply  with  certain  rules  as  to  their  reserves,  rates,  and 
investments.  In  any  case  they  do  not  issue  bank-notes,  be- 
cause the  national  laws  now  tax  the  notes  of  state  banks  so 
heavily  that  they  are  unprofitable.  National  banks,  the  larg- 
est and  most  important  portion  of  our  banking  system,  were 
authorized  by  law  in  1863,  during  the  Civil  War.  They  are 
subject  to  stricter  regulation  and  inspection  than  are  other 
banks,  and  that  regulation  is  perhaps  an  advantage  to  them, 
as  it  strengthens  public  confidence  in  their  stability.  Yet 
this  regulation  does  not  insure  the  depositors  against  loss, 
as  some  national  banks  fail  every  year.  They  may  be  or- 
ganized with  twenty-five  thousand  dollars  capital  in  towns 
of  less  than  three  thousand  population,  with  fifty  thousand 
dollars  in  towns  of  less  than  six  thousand,  with  one  hundred 
thousand  dollars  in  cities  of  less  than  fifty  thousand,  and 
with  two  hundred  thousand  dollars  in  larger  cities. 


5  Hi]  BANKS  OF   THE   UNITED   STATES   TO-DAY  469 

2.  Our  national  bank-notes  have  no  essential  mark  of  Nature  of 
typical  bank  money.  The  one  marked  peculiarity  of  the 
national  banks  of  the  United  States  as  compared  with  those 
of  other  countries,  is  their  mode  of  note-issue.  They  perform 
all  the  other  functions  of  banks,  essential  and  unessential, 
and  perform  them  well,  but  the  issue  of  bank-notes  is  op- 
tional with  them,  and  some  of  them  do  not  issue  any 
bank-notes.  The  legal  condition  to  their  issue  is  that  bonds 
of  the  United  States  shall  be  purchased  in  the  open  market 
and  deposited  with  the  treasurer  of  the  United  States.  Until 
1900,  notes  might  be  issued  only  to  ninety  per  cent,  of  the 
value  of  the  bonds  deposited ;  but  now  they  may  be  issued  up 
to  the  par  value  of  the  bonds.  The  notes,  being  secured  by 
the  value  of  the  bonds,  rest  on  the  credit  of  the  government, 
not  on  the  credit  of  the  bank.  These  notes  are  not  promptly 
sent  back  for  redemption  to  the  banks  issuing  them,  as  is 
done  with  typical  bank-notes.  They  may  circulate  thou- 
sands of  miles  away  from  the  bank  that  issued  them,  and  for 
years  after  that  bank  has  gone  out  of  business.  They  are 
not  an  ' '  elastic  currency ' '  increasing  or  diminishing  with  the 
needs  of  business.  The  changes  in  their  amount  depend 
upon  the  chance  of  the  banks  to  make  more  or  less  in  this 
way  than  by  any  other  use  of  their  capital,  and  this  in  turn 
depends  largely  on  the  price  of  bonds  and  on  the  rate  of 
interest  they  bear.  From  1864  to  1870,  fortunes  were  made 
from  this  source,  but  in  recent  years  there  has  been  little 
opportunity  of  gain  from  note-issues.  Our  present  bank- 
note issues  are  not  on  a  logical  basis,  and  satisfy  no  one  en- 
tirely. They  are  of  importance  neither  to  the  bank,  to 
which  they  afford  little  or  no  profit,  nor  to  the  public,  for 
which  they  do  a  service  equally  well  done  by  silver  certifi- 
cates, greenbacks,  or  coins. 

Along  with  the  discussion  of  the  currency  has  gone,  since   suggested 
1896,   a  vigorous  discussion  of  the  banking  system.     The   Jfe°™*k0_f 
two  problems  are  so  closely  related  that  a  change  in  the  one  note  system 
suggests  readjustment  of  the  other.    One  extreme  plan  is  to 


470  BANKING  AND  CREDIT  [CH.  48 

abolish  bank-notes  entirely  and  to  replace  them  with  addi- 
tional issues  of  greenbacks;  the  other  extreme  plan  is  to 
authorize  the  issue  of  almost  typical  bank-notes.  A  modifica- 
tion of  the  Canadian  banking  system,  which  has  great  merits, 
is  held  up  for  imitation.  Bills  have  been  repeatedly  before 
Congress  authorizing  the  maintenance  of  a  general  guarantee 
fund  with  which  the  notes  of  failed  banks  could  be  re- 
deemed, and  at  the  same  time  authorizing  branch  banks  such 
as  those  in  Canada.  Public  sentiment  has  never  strongly 
favored  this  plan,  however,  and  there  is  more  likelihood  of 
.  the  passage  of  a  bill  providing  for  emergency  notes  in  time 

of  financial  stress,  after  the  plan  followed  in  Germany. 

Bankregu-        That  the  control  of  banking  is  an  important  duty  of  gov- 

trctive1  Pr°~  ernment  is  the  conclusion  of  the  practical  world.    The  various 

measure        banking  systems  of  the  leading  countries  embody  different 

plans  for  the  one  purpose  of  the  adequate  control  of  banking 

in  the  public  interest.     Government  control  of  bank-notes 

is  felt  to  be  of  the  same  nature  as  factory  inspection,  that  is, 

to  be  a  protective  measure.     When  public  interests  are  at 

stake  and  private  interests  conflict  with  them,  government 

acts  to  forbid  one  citizen  from  doing  harm,  and  to  protect 

other  citizens  from  injury. 


CHAPTER  49 
TAXATION   IN   ITS   RELATION   TO   VALUE 

§  I.      PURPOSES   OP   TAXATION 

1.  Provision  for  the  expense  of  organized  government  is  Taxation 
the  fundamental  purpose  of  taxations  Taxation  may  be  de-  defined 
fined  as  the  taking  by  the  government  of  private  property 
for  public  uses.  This  implies  a  certain  degree  of  compulsion. 
When  the  national  government  accepts  ten  million  dollars  in 
trust  for  the  Carnegie  Institution,  it  is  not  taxation,  though 
wealth  is  given  for  public  uses.  The  effects  of  taxation  per- 
vade all  industrial  affairs,  but  they  will  be  discussed  here 
only  in  relation  to  the  value  of  goods  and  to  the  distribution 
of  incomes.  By  taxation  the  government  interferes  with  the 
individual's  free  choice  and  with  the  impersonal  economic 
forces.  It  expends  income  in  different  ways  from  those 
which  would  be  chosen  by  the  individual. 

The  primary  purpose  of  taxation  is  public  defense.    War  Taxation 
often  has  driven  men  into  closer  social  relations.     Public  J^^hc 
defense  requires  sacrifice  on  the  part  of  the  family  and  of 
the  individual.     In  family  or  patriarchal  communities  all 
share  a  common  income  and  combine  in  the  common  de- 
fense, but  self-preservation  compels  such  small  communities 
to  form  a  larger,  stronger  state  for  the  common  defense. 
Personal   service  in  the  field  gives  place  to  money  taxes 
permitting  a  more  regular,  continuing,  and  perfect  organiza- 
tion of  military  forces. 

Next  comes  the  need  of  civil  government  to  insure  domestic  TO  preserve 
tranquillity.    As  political  unity  grows,  the  citizens  need  less  J^J8*1 

471 


472 


TAXATION  IN  ITS  RELATION   TO   VALUE 


[CH.  49 


Developing 

public 

wants; 

social  and 

industrial 

welfare 


often  protection  against  foreign  foes,  and  they  need  more 
often,  relatively,  defense  against  the  aggressions  of  some  of 
their  own  countrymen.  The  preservation  of  domestic  order 
requires  police,  courts  of  justice,  and  other  agencies.  The 
ideal  of  the  anarchist  to  do  without  government  is  nowhere 
realized.  Everywhere  there  must  be  government  to  preserve 
peace  and  to  protect  property.  Unfortunately,  this  need 
grows  with  the  growing  density  of  population.  Crime  in- 
creases when  men  swarm  in  great  cities.  To  maintain  and 
operate  the  social  machinery  requires  ever-increasing  re- 
sources. The  courts  which  settle  disputes  between  men,  and 
which  interpret  their  contracts,  are  agencies  of  peace,  dis- 
placing physical  contests.  Many  other  public  expenses  tend 
to  enlarge,  as  those  for  legislative  bodies,  public  buildings, 
statistical  inquiries,  the  printing  of  public  documents. 
Government  on  these  accounts  has  become  in  modern  times 
an  increasingly  costly  institution. 

2.  The  promotion  of  the  social  and  industrial  welfare  of 
society  has  come  to  be  an  important  purpose  of  taxation. 
Some  functions  of  government,  less  essential  than  the  pri- 
mary ones  just  mentioned,  seem  naturally  to  grow  out  of 
them.  In  a  democratic  society,  popular  education  is  one  of 
the  necessary  conditions  of  good  government,  as  it  appears 
that  domestic  order  is  not  possible  in  a  democratic  state  with- 
out intelligent  citizens.  Step  by  step  the  functions  of  gov- 
ernment are  widened.  Some  industrial  functions  are  per- 
formed by  the  government  in  connection  with  the  primary 
needs.  Light-houses  are  necessary  to  guide  the  navy,  but 
they  also  serve  to  guide  the  merchant  marine  and  to  aid 
industry.  The  post  was  established  as  an  agent  of  political 
and  military  government  to  connect  the  ruler  with  the  out- 
posts (a  fact  the  name  post  indicates),  but  the  postal  service 
has  grown  in  every  country  to  be  a  great  industrial  and 
social  agency.  The  consular  service,  beginning  in  the  polit- 
ical need  of  keeping  official  representatives  in  foreign  lands, 
has  grown  to  be  a  great  economic  agency.  Consuls  are 


§1]  PURPOSES  OF   TAXATION  473 

commercial  travelers,  advancing  the  trade-interests  of  their 
countries  in  all  quarters  of  the  globe.  These  social  and  in- 
dustrial functions  have  been  increasing  of  late.  As  the 
national  and  local  governments  engage  more  in  industry, 
they  usually  make  larger  demands  in  the  shape  of  taxation. 

It  is  along  the  border-line  between  the  primary  and  the  The_sphere 
secondary  purposes  of  taxation  that  the  contest  goes  on  g^*^**16 
regarding  the  proper  functions  of  government.  If  they  are 
to  stop  short  of  the  extreme  of  socialism,  where  shall  the 
line  be  drawn?  The  movement  has  been  of  late  toward 
greater  government  activity;  more  of  the  wants  of  men  are 
thus  supplied  through  the  agency  of  the  state.  That  year 
by  year  a  greater  sum  is  taken  by  taxation  and  spent  for  the 
citizen  is  a  fact  that  may  be  recognized  without  debate  here. 
The  toll-road  becomes  a  public  road,  the  toll-bridge  becomes 
free,  more  is  supplied  by  taxation  for  schools,  for  advanced 
research,  and  for  technical  training.  In  our  country  great 
wealth  was  given  by  the  Morrill  Act  to  scientific  and  tech- 
nical schools.  The  state  universities,  against  much  opposi- 
tion, have  become  in  many  states  of  the  Union  the  dominant 
educational  force.  Moreover,  taxation  often  is  used  as  a 
means  not  merely  of  raising  revenue,  but  of  discouraging 
one  kind  of  industry  and  encouraging  another.  One  indus- 
try wanes  or  dies  under  increasing  burdens,  another  waxes 
strong  by  fostering  exemptions  and  bounties.  A  large  share 
of  this  ''protective  legislation"  is  done  under  the  guise  of 
taxation. 

3.     Shifting  of  the  limits  of  state  action  and  corresponding  Government 
changes  in  the  weight  of  taxation  are  constantly  affecting  asac°n~ 
value  and  incomes.    Society  as  a  whole  is  made  up  of  many  good  and  as 
groups  of  industry.    Government  is  the  largest  of  these,  col-  J^^^f 
lecting  and  expending  more  than  any  individual  or  corpora- 
tion.   Government  is  in  one  aspect  a  consumption  good.    In 
return  for  its  collective  cost  men  collectively  get  the  enjoy- 
ment of  social  organization,  markedly  in  contrast  with  the 
uncertain  ties  and  hazards  of  primitive  communities.     But 


474  TAXATION  IN  ITS  RELATION   TO  VALUE  [CH.  49 

government  becomes  also  a  mode  of  social  investment,  an 
indirect  agent,  a  productive  enterprise.  Wealth  applied 
through  it  secures  a  greater  product  than  is  possible  by 
individual  action.  Government  can  maintain  light-houses 
more  economically  than  individuals  could  otherwise  secure 
them. 

Apportion-  But  when  the  government  undertakes  these  various  tasks, 
cost°f  the  ^e  exPense  ^ a^s  unequally  on  individuals  and  affects  differ- 
ently their  incomes.  When  free  schools  take  the  place  of 
private  schools,  the  law  compels  every  one  to  contribute  to 
education.  To  many  individuals  it  is  a  matter  of  indiffer- 
ence whether  they  pay  tuition  or  taxes,  but  the  wealthy 
bachelor  sometimes  grumbles  when  forced  to  help  in  educat- 
ing the  day-laborer's  family  of  twelve.  The  average  result 
may  be  right,  but  individuals  diverge  from  the  average  and 
thus  have  constantly  a  motive  to  attempt  to  change  the 
limits  of  governmental  action.  Happily  the  subject  is  not 
always  viewed  with  selfish  eyes.  The  ethical  and  patriotic 
thought  is  not,  "How  will  this  affect  my  interests?"  but, 
' '  How  will  it  affect  the  general  interests  1 ' '  But  as  the 
question  of  value  is  always  involved,  men  are  usually  found 
favoring  or  opposing  a  measure  of  taxation  according  as  it 
affects  their  own  income.  Thus  taxation  is  inevitably  an 
economic  question. 

§  II.      FORMS    OF    TAXATION 

The  various  1.  Taxes  usually  are  a  portion  taken  from  the  income 
arising  from  labor  or  from  wealth.  In  rare  cases  more  than 
the  net  income  of  wealth  may  be  taken,  but  the  aim  of 
taxation  in  general  is  to  take  only  a  portion  of  the  income 
for  public  uses.  As  economic  income  has  many  sources,  it 
may  be  intercepted  at  many  different  points,  and  taxation 

on  incomes  may  take  various  forms.  First,  private  income  may  be 
appropriated  by  a  tax  on  income.  This  is  the  simplest  in 
thought,  but  the  administrative  difficulties  of  the  income- 


§11]  FORMS  OF   TAXATION  475 

tax  are  great  in  practice.  It  is  not  easy  to  determine  the 
money  value  of  the  various  sources  of  enjoyment  that  come 
into  a  man's  possession  in  the  course  of  a  year,  including, 
as  the  ideal  requires,  the  immaterial  gratifications  along 
with  the  material.  A  second  form  is  a  tax  on  property  in  On  property 
proportion  to  value.  Since  the  value  of  material  wealth  is 
the  capitalization  of  the  rentals  at  the  prevailing  rate  of 
interest,  the  property  tax,  so  far  as  it  applies  to  material 
wealth,  should  take  an  approximately  equal  proportion  of 
incomes.  If  it  were  accurately  assessed,  it  would  be  in 
some  respects  better  than  a  tax  on  actual  rents,  for  it  reaches 
the  prospective,  or  speculative,  rental.  A  third  form  of  tax  onexpendi- 
is  one  on  consumption,  or  expenditure.  This  is  but  another 
mode  of  attacking  income,  for  in  the  long  run  income  is 
spent,  not  always  by  the  individual  who  earned  it,  but  by 
some  one,  and  thus  it  is  reached  by  a  tax  on  expenditure. 
The  principal  consumption  taxes  in  the  United  States  are 
the  tariff  duties  and  the  internal  revenues  of  the  national 
government.  In  time  of  war,  internal  revenues  are  ex- 
tended in  the  United  States  to  a  multitude  of  articles,  but 
usually  they  are  limited  (with  minor  exceptions)  to  liquor  On  business 
and  tobacco.  A  fourth  form  of  tax  is  one  on  selected  agen- 
cies of  industry;  such  are  business  taxes,  licenses,  taxes  on 
investment  in  business,  corporation  taxes,  etc.  These  bur- 
dens are  diffused  and  rest  eventually  on  some  income,  not 
always  exactly  ascertainable.  Actual  tax  systems  combine 
these  forms  in  great  variety,  subtracting  many  minute  frac- 
tions from  each  citizen's  income  in  ways  unsuspected  by 
him. 

2.     The  immediate  effect  of  a  change  in  the  form  of  tax-   changes  of 
ation  is  a  change  in  the  market  value  of  goods.    If  the  new  and  in cap. 
tax  reduces  the  net  rent  of  any  productive  agent,  it  reduces   itaiization 
likewise  its  value,  which  is  but  the  capitalization  of  its  net 
rental.     If  taxes  are  taken  off  of  factories  and  put  upon 
farm  rents,  factories  rise  and  farm-land  falls  in  value.    The 
immediate  change  in  value  is  much  greater  than  the  annual 


476  TAXATION  IN  ITS  RELATION  TO  VALUE  [CH.  49 

tax,  for  if  five  dollars  is  to  be  taken  permanently  from  the 
annual  rental  of  the  farm,  nearly  one  hundred  dollars  is 
taken  at  once  from  its  selling  value. 

Taxes  are  reckoned  by  enterprisers  as  a  part  of  the  cost 
of  production  whenever  the  conditions  of  competition  and 
of  substitution  make  it  possible  to  do  so.  In  such  a  case  the 
products  rise  in  price  and  most  of  the  tax  falls  upon  the 
consumers.  In  the  Civil  War  an  increase  in  the  tax  on 
whisky  increased  its  selling  price,  and  distillers  who  owned 
stocks  on  which  a  smaller  tax  had  already  been  paid  reaped 
profits  of  millions  of  dollars.  When  recently  the  tax  on  tea 
was  increased  in  England,  all  dealers  who  had  accumulated 
a  stock  before  the  law  went  into  effect  were  gainers.  Every 
change  in  taxation  inevitably  affects,  either  favorably  or 
unfavorably,  many  interests.  The  chance  to  anticipate  a 
change  in  tax  laws  or  to  get,  from  those  in  power,  informa- 
tion of  a  proposed  change,  makes  speculation  possible  and 
political  corruption  profitable. 

Shifting  3.     After  every  change  in  taxation,  competition  among 

andinci-  Bargainers  goes  on  and  a  new  equilibrium  of  prices  results. 
taxation  The  citizen  who  pays  a  tax  into  the  public  treasury  is  not 
always  the  one  whose  income  is  reduced  in  the  long  run.  In 
most  cases  the  final  and  regular  burden  of  the  tax  is  dis- 
tributed over  a  number  of  incomes.  The  passing  on  of  the 
burden  is  called  the  shifting  of  the  tax;  the  location  of  the 
final  burden  is  called  the  incidence  of  the  tax.  The  law- 
maker cannot  tell  exactly  where  the  weight  will  fall.  The 
principles  of  value  give  some  guidance  in  the  inquiry,  but 
the  workings  of  the  principle  are  difficult  to  follow.  Cer- 
tain it  is  that  the  new  tax,  both  in  its  collection  and  in  its 
expenditure,  becomes  a  new  influence  in  industry.  Some 
occupations  are  made  more  attractive,  others  less  so.  Some 
places  are  made  more,  others  less,  desirable  to  live  in.  As 
property  thus  fluctuates  in  value,  as  investments  become 
more  or  less  remunerative,  the  market  price  of  corporation 
stocks  rises  and  falls.  The  rate  of  adjustment  varies  greatly 


PRINCIPLES  AND  PRACTICE  477 

under  different  conditions.     The  inflow  and  the  outflow  of 
labor  and  capital  are  more  or  less  rapid  in  the  various  in-    f 
dustries. 

The  fact  that  a  change  in  taxation  is  a  disturbing  element  Many 
in  price  is  not  to  be  thought  insignificant  merely  because  ^^ 
*  *  all  comes  out  right  in  the  end. ' '    Every  change  in  taxation  affected 
is  an  element  of  uncertainty  in  business  and  increases  the     * 
fortunes  of  some  men  at  the  expense  of  others.     Hence  no 
considerable  change  should  be  made  without  good  reasons  in 
its  favor.     The  older  taxes  have  the  virtue  of  stability,  but 
in  many  cases  they  have  grown  out  of  harmony  with  the 
industrial  conditions.     While,  therefore,  from  time  to  time 
there  is  a  real  need  of  a  reform  in  the  tax  system,  it  should 
not  be  undertaken  without  recognizing  the  many  and  com- 
plex interests  involved. 

§  III.      PRINCIPLES  AND  PRACTICE 

1.  Taxation  should  be  adjusted  with  reference  to  the  gen-  various 
eral  social  interest.  Many  standards  have  been  suggested  ^^rds 
to  measure  the  distribution  of  the  burden  of  taxation,  such  suggested 
as  benefit,  equality,  and  ability.  Each  of  these  terms  is 
capable  of  various  interpretations  which  have  changed  from 
time  to  time.  The  benefit  derived  by  any  citizen  from  most 
of  the  public  services  evidently  cannot  be  measured  with 
exactness.  The  standard  of  equality  cannot  be  applied  in 
any  literal  sense  to  strong  and  weak,  to  rich  and  poor.  It 
is  possible,  however,  to  interpret  equality  with  reference  not 
to  objective  goods,  but  to  the  psychic  sacrifice  occasioned  by 
taxation.  Ability  thus  is  of  many  kinds  and  may  be  differ- 
ently understood.  Some  think  ability  to  bear  taxation  is  '  *  in 
exact  proportion  to  the  money  income";  others  believe  that 
it  increases  at  a  greater  rate  than  money  income,  and  favor, 
therefore,  progressive  taxation,  that  is,  higher  rates  on  the 
larger  incomes. 

The  conflicting  interests  of  the  classes  in  each  period  are 


478  TAXATION  IN  ITS   RELATION   TO  VALUE  [CH.  49 

social  to  some  degree  softened  by  the  social  conscience,  and  taxes 

aTthTaim  are  adJusted  according  to  a  vaguely  held  ideal  of  the  social 
welfare.  Social  expediency,  more  or  less  broadly  inter- 
preted, determines  who  shall  be  taxed  and  what  will  give 
the  best  social  results.  The  exemptions  from  taxation  in  feu- 
dal times  were  great,  and  viewed  from  our  standpoint  were 
t  inequitable,  for  it  was  the  upper  classes  who  escaped  while 
the  peasants  bore  all  the  burdens.  The  landlords  and  no- 
bility who  were  assumed  to  be  performing  important  social 
functions,  often  had  outgrown  their  usefulness.  Exemptions 
are  granted  liberally  in  most  states  to-day  for  some  purposes 
and  to  some  classes  of  citizens;. to  educational,  religious,  and 
charitable  institutions ;  to  the  homes  of  priests  and  ministers ; 
to  homesteads  purchased  with  pension  money,  etc.  Califor- 
nia alone  of  all  the  states  in  the  Union  continued  until  1903 
to  tax  churches  and  private  schools.  The  social  interest 
requires  that  taxes  be  both  elastic  and  productive,  so  that 
the  needs  of  the  government  shall  be  amply  provided  for. 
The  harmonizing  of  these  needs  in  the  laws  of  taxation  re- 
quires a  high  degree  of  wisdom,  of  foresight,  and  of  integ- 
rity, in  the  legislator  and  in  the  citizen.  No  hard-and-fast 
rule  for  the  apportioning  of  taxes  can  be  laid  down.  The 
decision  must  be  made  in  each  generation  by  social  opinion, 
guided  by  the  social  conscience. 

Principles  of  2.  The  administration  of  taxation  should  be  economical, 
admmistra-  cerfain^  and  uniform.  Whatever  taxes  are  adopted,  whether 
on  property  or  income,  whether  at  a  proportional  or  a  pro- 
gressive rate,  their  justice  and  expediency  depend  largely 
on  their  administration.  Principle  and  practice  in  this  as  in 
most  affairs  may  go  far  apart.  Some  laws  are  more  easily 
and  economically  executed  than  others.  The  time  of  collec- 
tion should  be  as  convenient  as  possible  for  the  citizen,  and 
the  mode  of  payment  should  be  the  most  simple.  As  to  the 
time,  method  of  payment,  and  amount,  the  utmost  certainty 
is  desirable.  Taxation  that  is  variable,  shifting,  dependent 
on  personal  whim  and  favoritism,  is  despotism.  Above  all, 


§HIJ  PRINCIPLES  AND  PRACTICE  479 

the  administration  of  the  law  should  be  uniform  and  im- 
partial,—yet  this  is  a  principle  most  frequently  departed 
from  in  practice.  The  assessment  of  taxes  has  to  be  intrusted 
to  men  with  fallible  judgment,  imperfect  knowledge,  and 
selfish  interests.  The  assessor  is  as  near  a  despot  as  any 
agent  of  popular  government  to-day.  Not  infrequently  it  is 
to  men  incapable  of  earning  two  dollars  a  day  in  any  private 
business  that  the  power  is  given  of  passing  judgment  on  the 
value  of  millions  of  dollars'  worth  of  property.  Under  the 
circumstances,  evils  are  to  be  expected  and  they  occur.  The 
small  property-owner  often  is  crushed  under  the  unequal 
assessment  while  the  large  owner  comes  lightly  off.  Po- 
litical friends  are  favored,  political  foes  are  made  to  suffer. 
Woman  nearly  everywhere  pays  more  than  her  fair  share 
of  taxes,  a  fact  that  the  advocates  of  woman  suffrage  do  not 
fail  to  urge  as  an  argument  for  their  cause,  although  wo- 
men's disadvantage  in  this  matter  is  little  greater  than  that 
of  any  man  without  special  political  influence. 

3.  The  relation  of  taxation  to  private  incomes  makes  it  importance 
one  of  the  largest  public  questions  of  the  day.  The  dis-  °*!fx*JJ£ 
cussion  of  taxation  has  accompanied  the  growth  of  free  gov-  question 
ernment  in  England  and  America  from  the  time  of  Magna 
Charta.  The  control  of  the  public  purse  frequently  was  the 
occasion  of  conflict  between  the  monarch  and  the  people. 
Taxation  was  a  leading  issue  in  the  American  Revolution. 
While,  therefore,  it  cannot  be  said  that  the  subject  has 
been  of  no  great  importance  in  the  past,  it  is  true  that 
in  our  own  national  history  since  the  adoption  of  the  Con- 
stitution, taxation  has  not  been  much  discussed,  except 
in  the  one  aspect  of  the  tariff.  Constitutional  and  political 
questions,  states  rights,  and  the  question  of  slavery,  long 
absorbed  the  interest  of  citizens  and  legislators.  But  with 
the  aroused  interest  of  the  public  in  economic  problems, 
taxation  is  attracting,  and  is  certain  to  attract  in  the  next 
few  years,  increasing  attention  in  local,  commonwealth,  and 
national  politics. 


The  motive 
of  individ- 
ual gain  in 
foreign 
trade 


CHAPTER  50 

THE  GENERAL  THEORY  OF  INTERNATIONAL 
TRADE 

§  I.      INTERNATIONAL  TRADE  AS  A  CASE  OF  EXCHANGE 

1.  International   trade  is   exchange   between  individual 
men,  and  has  the  same  object  as  other  exchange  of  goods. 
The  term  international  trade  should  not  be  misunderstood  as 
meaning  that  nations  rather  than  individuals  engage  in  it. 
International  trade  differs  from  domestic  trade  only  in  the 
fact  that  the  parties  are  citizens  of  different  sovereign  states. 
Exchanges  between  men  in  the  same  village,  between  those 
in  neighboring  villages,  and  between  those  in  different  coun- 
tries, are  prompted  by  essentially  the  same  economic  motive— 
the  wish  to  increase  the  want-gratifying  power  of  goods.    In 
every  such  case  both  parties  gain  or  think  they  are  gaining. 
In  international  trade  there  is  the  same  chance  for  mistake 
as  in  domestic  trade,  but  no  more.     In  a  single  transaction 
in  either  domestic  or  foreign  trade  one  party  may  be  cheated, 
but   the   continuance   of   trade   relations   is   dependent   on 
continued   benefits.      The   once   generally   accepted   maxim 
that  the  gain  of  one  in  trade  is  the  loss  of  another,  is  rarely 
applied  now  except  to  international  trade.     The  starting 
point  for  the  consideration  of  this  subject  is  in  this  proposi- 
tion: Foreign  trade  is  carried  on  by  individuals,  for  indi- 
vidual gain,  with  the  same  motives  and  for  the  same  benefits 
as  are  found  in  other  trade. 

2.  As  commerce  has  grown,  the  territorial  division  of 
labor  has  correspondingly  increased.     Although  economic 

480 


§IJ     INTERNATIONAL  TRADE  AS  A  CASE  OF  EXCHANGE     481 

motives  have  had  influence  in  political  affairs  and  have  Natural 
helped  to  determine  political  groupings  and  the  limits  of  f^ti^g 
modern  nations,  there  is  to-day  no  very  close  correspondence  foreign 
between  political  and  economic  boundary  lines.  Both  in- 
dustrial and  political  conditions  have  changed  so  rapidly 
that  the  lines  often  have  tended  to  diverge  rather  than  to 
agree.  It  is  common  for  two  portions  of  a  nation  to  ex- 
change far  less  than  do  two  portions  of  entirely  different 
nations.  The  great  territorial  divisions  of  industry  are  de- 
termined first  and  mainly  by  differences  of  climate,  soil,  and 
natural  resources.  Thus  trade  arises  easily  between  north 
and  south,  between  warjpa  and  frigid  climes,  between  new 
countries  and  old,  between  regions  -sparsely  and  regions 
densely  populated.  Foreign  trade  with  distant  lands  is  as 
old  as  history.  In  medieval  times  the  luxuries  of  the  tern-  Political 
perate  zone  were  mostly  articles  produced  in  the  tropics,  abrad 
Political  divisions  usually  have  not  been  large  enough  to 
embrace  widely  varied  soils  and  climates,  the  Roman  Empire 
being  an  exception  in  marked  contrast  with  the  compara- 
tively small  political  units  of  the  Middle  Ages.  Before 
modern  methods  of  transportation,  a  large  free  federal  state 
like  our  republic  was  impossible.  As  in  recent  centuries  the 
large  political  units  have  been  formed,  the  question  has 
arisen,  Shall  the  political  boundary  be  likewise  the  economic 
boundary  marking  the  limits  of  trade?  The  firm  constitu- 
tional Union  of  the  American  states  arose  out  of  difficulties 
with  regard  to  trade.  The  German  Zollverein,  the  forerunner 
of  the  modern  German  Empire,  had  a  similar  origin.  The 
Australian  Federation  consummated  within  the  last  few 
years  has  grown  out  of  the  need  of  adjusting  tariffs  and 
tariff  boundaries.  These  larger  political  units  containing 
such  varied  resources  can  in  larger  measure,  but  never  com- 
pletely, become  independent  of  the  rest  of  the  world  if  they 
will. 

Territorial  division  of  trade  is  determined  secondly  by 
differences  in  the  accumulation  of  wealth,  in  the  development 

31 


482     GENERAL  THEORY  OF  INTERNATIONAL   TRADE     [CH.  so 


Differences 
in  culture 
and 
industry 


Compara- 
tive costs 
as  between 
individual 
workers 


As  between 
communi- 
ties differ- 
ing in 
advantages 


of  capital,  of  invention,  and  of  organization,  in  the  degree 
of  intelligence  of  the  workers,  and  in  the  grade  of  civiliza- 
tion. It  is  mainly  trade  due  to  this  second  group  of  causes, 
and  carried  on  between  old  and  new  countries  of  about  the 
same  latitude,  that  is  the  subject  of  discussion  in  economic 
treatises  on  international  trade. 

3.  The  doctrine  of  comparative  costs  is  that  relative, 
not  absolute,  advantages  of  production  determine  for  a  coun- 
try the  benefits  of  international  trade.  The  free-trade  ques- 
tion in  any  country  is  whether  it  is  for  its  interests  as  a  whole 
to  permit  trade  between  its  citizens  and  the  citizens  of  other 
countries.  The  question  appears  especially  difficult  where 
both  countries  have  natural  resources  of  about  the  same  char- 
acter (as  iron  and  coal  in  the  case  of  England  and  America), 
and  where,  therefore,  both  can  produce  the  things  that  are 
exchanged.  If  American  labor  can  produce  as  much  iron  in 
a  day  as  English  labor,— or  more,— is  it  not  foolish  and 
wasteful,  it  is  asked,  not  to  produce  that  wealth?  Now,  ex- 
actly the  same  case  is  presented  in  simple  neighborhood  ex- 
changes. The  merchant  may  be  able  to  keep  his  books  better 
than  does  the  bookkeeper  whom  he  employs.  The  proprietor 
may  be  able  to  sweep  out  the  store  better  than  the  cheap  boy 
does  it.  The  carpenter  may  be  able  to  raise  better  vegetables 
than  can  the  gardener  from  whom  he  purchases,  and  yet  the 
merchant  and  the  carpenter  do  not  quit  their  better-paying 
work  and  turn  to  clerking  or  to  raising  vegetables. 

It  often  happens  that  both  countries  can  technically  pro- 
duce both  the  articles  that  are  internationally  exchanged. 
It  may  frequently  happen  that  one  of  the  two  countries  has 
an  advantage  in  amount  of  sacrifice  and  effort,  as  to  both 
articles;  but  if  the  advantage  is  greater  in  one  article  than 
in  the  other,  the  foreigners,  like  the  low-paid  clerk,  will  be 
willing  to  exchange  at  a  ratio  that  will  make  it  profitable  to 
specialize  in  the  product  wherein  the  greater  superiority 
lies.  Therefore  not  the  advantage  as  to  a  single  product, 
enjoyed  by  one  country  over  the  other  is  most  important 


§  IJ      INTERNATIONAL  TRADE  AS  A  CASE  OF  EXCHANGE    483 

in  determining  whether  to  produce  at  home  or  to  exchange, 
but  the  comparative  advantages  enjoyed  in  the  production 
of  the  two  articles  in  question. 

It  must  be  remembered  that  comparative  cost  as  here  Examples  of 
used  refers  to  cost  in  effort,  not  to  money  cost,— a  point  on 
which  there  is  often  confusion.  The  money  cost  of  a  certain 
product  is  often  greater  in  a  new  country  because  wages  are 
high,  and  wages  are  high  just  because  psychic  cost  is  low, 
that  is,  because  labor  can  produce  so  much.  At  the  time  of 
the  great  gold  discoveries  in  1849-50,  the  price  of  goods  in 
California  was  much  higher  than  in  the  East,  and  much 
higher  in  Australia  than  in  Europe.  A  day's  labor  doubtless 
would  produce  as  much  food  in  Australia  and  in  California 
as  in  New  England  and  in  Norway,  but  it  produced  far 
more  gold.  Hence  butter  and  cheese  were  shipped  by  long 
routes  from  Norway  to  Australia  and  from  New  England 
around  Cape  Horn  to  California,  to  be  exchanged  for  gold. 
One  of  the  standing  arguments  against  foreign  trade  is  based 
on  the  idea  that  a  country  cannot  profitably  import  goods 
unless  it  is  at  an  absolute  disadvantage  in  their  production. 
It  is  declared  that  as  our  country  can  produce  these  goods  ' '  as 
well"  as  foreign  countries  (meaning  with  as  few  days' 
labor),  there  is  a  loss  on  every  unit  imported. 

4.     The  equation  of  international  exchange  is  that  adjust-   selection  of 
ment  of  prices  which  results  in  the  equalizing  of  the  imports  the  ™ost 
and  exports  of  the  country.    The  superiority  of  a  new  coun-   industries 
try  over  an  old  one  is  not  equally  great  in  every  line  of 
industry.    It  is  almost  certainly  most  marked  in  those  enter- 
prises where  natural  resources  are  employed.     To  compete 
with  the  older  country  in  less  favored  industries,  capital  and 
labor  in  the  new  are  forced  to  take  a  lower  rate  than  they 
can  earn  in  the  more  favored.     Without  any  government 
supervision,   therefore,   but  simply   through  the  choice   of 
enterprisers  seeking  the  best  investment  of  capital,  industries 
are  developed  in  which  the  country  is  either  most  markedly 
superior  or  least  inferior  to  its  neighbors. 


Persistence 
of  the 
differences 


The  ratio 
of  interna- 
tional 
demand 
defined 


484      GENERAL  THEORY  OF  INTERNATIONAL  TRADE    [CH.  50 

If  the  productive  energies  of  men  interchanged  between 
industries  and  between  countries  with  perfect  readiness,  a 
perfect  equilibrium  of  advantage  would  everywhere  result. 
In  every  country,  in  every  occupation,  labor  and  capital  of 
given  quality  and  amount  would  receive  the  same  reward. 
But  the  interchange  of  labor  and  capital  between  countries 
is  never  without  friction.  Adam  Smith  said  that  ' '  a  man  is 
of  all  sorts  of  luggage  the  most  difficult  to  be  transported." 
The  higher  wages  in  a  new  country  are  sufficient  to  attract 
constantly  from  the  older  lands  a  portion  of  their  labor 
supply;  the  higher  rate  of  interest  in  the  new  countries  at- 
tracts constant  additions  of  capital ;  yet,  despite  these  forces 
working  toward  equalization,  the  inequality  may  remain  and 
through  the  working  of  other  influences  even  increase  in  the 
course  of  years. 

The  laborers,  enterprisers,  and  investors  in  the  one  coun- 
try are  thus  in  a  position  of  more  or  less  enduring  advantage 
relative  to  those  of  the  other  countries.  The  advantage  is 
sometimes  said  to  be  a  ' '  monopoly ' '  which  they,  or  the  coun- 
try as  a  whole,  enjoy ;  but  in  the  absence  of  any  contractual 
limiting  of  competition,  this  is  a  misuse  of  the  term  monop- 
oly. This  variation  in  the  degree  of  scarcity  of  agents  in 
different  territories  is  not  peculiar  to  nations  as  a  whole. 
Differences  of  the  same  nature  exist  between  the  Northern 
and  the  Southern  states  of  the  American  Union,  have  con- 
tinued for  decades  between  Eastern  and  Western  states,  and 
are  found  even  between  neighboring  counties.  The  differ- 
ences between  two  countries,  however,  are  likely  to  be  more 
marked,  the  circulation  of  factors  being  so  active  within  a 
country  that  it  is  allowable  to  speak  broadly  of  prevailing 
national  rates  of  wages  and  of  interest. 

Every  exchange  of  goods  between  the  countries  is  made 
at  a  ratio  that  reflects,  or  expresses,  this  abiding  difference  in 
comparative  costs.  The  imports  into  the  favored  country 
represent  regularly  the  results  of  more  units  of  labor  of  a 
given  grade  than  do  the  corresponding  exports.  The  ratio 


§IIJ         THEORY  OF  FOREIGN  EXCHANGES  OF  MONEY        485 

which  expresses  the  disparity  of  advantage  of  productive 
factors  is  called  "the  equation  of  international  demand." 
This  does  not  mean  that  the  money  value  of  the  imports 
exceeds  that  of  the  exports,  or  vice  versa.  On  the  contrary, 
the  equation  itself  embodies  a  maxim  of  international  trade 
that  "in  the  long  run,"  or  "on  the  average,"  imports  and 
exports  must  be  equal  in  value  (i.e.,  equation  of  demand). 
This  brings  us  to  the  theory  of  foreign  exchanges,  which  is 
essential  to  an  understanding  of  this  feature  of  international 
trade. 


§  II.      THEORY  OF  FOREIGN  EXCHANGES  OF  MONEY 

1.  Foreign  exchange  of  money  is  the  purchase  and  sale  Purpose  of 
of  the  right  to  receive  a  given  kind  and  weight  of  metal  at  a  ^^  e 
specified  time  and  place.  Par  of  exchange  is  the  number  of 
units  of  the  standard  coin  of  one  country  that  contain  the 
same  amount  of  fine  gold  (or  silver)  as  the  standard  coin  of 
the  other  country.  Usually  the  English  pound  is  taken  as 
the  basis  in  the  tables  which  express  the  ratio  of  the  gold  in 
the  standard  coins  of  different  countries.  The  gold  shipping 
point  is  par  of  exchange  plus  or  minus  the  cost  of  moving 
the  actual  metal ;  it  varies  with  means  of  transportation  and 
communication.  The  par  of  exchange  between  England  and  The  rate  of 
America  being  $4.866  and  the  cost  of  expressing  and  in-  J^JJJjJJ  e 
suring  a  gold  pound  between  New  York  and  London  being 
approximately  .03,  the  shipping  point  for  the  export  of  gold 
from  New  York  is  $4.896.  At  the  upper  and  lower  limits, 
there  is  a  motive  for  shipping  gold  as  a  commodity.  If  each 
transaction  were  independent  of  all  others,  the  cost  of  ex- 
change would  be  the  weight  of  metal  called  for,  plus  grains 
enough  more  to  pay  for  loss  of  interest,  cost  of  freight, 
risk,  and  trouble.  In  such  a  case  it  would  cost  $4.896 
to  remit  one  pound;  while  a  debt  of  one  pound  payable  in 
London  would  at  the  same  time  be  worth  $4.836  to  the  credi- 
tor in  New  York.  When,  in  New  York,  a  number  of  men  hav- 


486   GENERAL  THEORY  OF  INTERNATIONAL  TRADE  [CH.  ;>o 

ing  bills  to  pay  in  London  meet  a  number  of  owners  of  bills 
receivable  in  London,  a  market  for  London  drafts  is  created 
and  a  rate  of  exchange  results  somewhere  between  the  ship- 
ping points.  In  this  is  the  explanation  of  the  variation  of 
the  rate,  and  of  the  facts  that  the  cost  of  outward  exchange 
sometimes  is  less  than  the  par  of  exchange  and  that  the  value 
of  foreign  drafts  sometimes  is  above  par. 

variation          The  balancing  of  foreign  exchanges  is  of  essentially  the 
about  par  of  same  nature  as  the  domestic  cancelation  of  indebtedness.    It 

exchange 

is  going  on  constantly  between  two  merchants  in  the  same 
town,  between  two  banks  in  the  same  town  who  represent 
groups  of  merchants,  between  men  in  neighboring  towns, 
between  distant  states  like  New  York  and  California,  and 
between  the  trading  nations  of  the  world.  The  price  of  ex- 
change to  the  individual  is  reduced  by  the  specializing  of 
the  business  in  the  hands  of  a  few  dealers,  permitting 
cancelation  of  indebtedness  or  offsetting  of  exchange,  and 
greatly  reducing  the  amount  of  bullion  to  be  transported. 
Exchange  varies  above  and  below  par  as  conditions  change. 
When  the  movement  of  money  is  into  the  country,  drafts  on 
London  are  bought  and  sold  for  less  than  par,  for  every 
pound  draft  thus  remitted  to  London  reduces  the  need  of 
shipping  gold  to  this  country,  while  every  London  draft 
collected  in  New  York  at  such  a  time  increases  the  need  to 
ship  gold. 

The  cash  2.     International  shipment  of  money  is  always  just  the 

balance  of      amount  needed  to  balance  the  accounts  due.    The  proposition 

interna- 
tional trade    that  in  the  long  run  the  value  of  imports  must  equal  the 

value  of  exports,  while  the  fundamental  truth  in  the  theory 
of  international  trade,  must  be  understood  in  a  broad  sense. 
Into  the  balance  between  the  traders  of  two  nations  enter 
many  items:  the  cash  values  of  the  imports  and  exports 
of  each;  freights,  insurance  premiums,  and  commissions; 
the  expense  of  Americans  traveling  in  foreign  lands,  and 
the  cost  of  the  foreign  service  of  this  government  (such 
as  the  salaries  of  consuls  and  of  diplomatic  representatives) 


§ll]         THEORY  OF  FOREIGN  EXCHANGES  OF  MONEY        487 

which  count  as  the  importation  to  America  of  an  equivalent 
amount  of  food,  clothing,  and  sundry  services ;  subsidies  and 
war  indemnities  to  foreign  nations  representing,  as  they  do, 
an  expenditure,  which  at  the  moment  may  be  paid  in  coin, 
but  which,  as  is  to  be  more  fully  explained,  must  be  offset 
ultimately  in  some  way  by  exports. 

Many  credit  transactions  affect  the  balance  one  way  or  various 
another  until  settled.  The  loans  made  by  European  capital  credititems 
to  the  American  government  or  to  individuals  and  corpora-  into  the 
tions  in  America,  as  well  as  the  European  capital  expended  balance 
in  purchasing  American  enterprises,  require  the  remitting 
of  gold  to  New  York,  and  thus  offset  many  imports  of  goods 
to  New  York  otherwise  calling  for  the  remitting  of  gold  to 
London.  In  the  direction  opposite  to  this,  act  the  interest 
payments  and  the  eventual  repayment  of  the  principal  loan, 
for  these  require  either  money  or  goods  to  be  exported  from 
America  to  the  value  of  the  obligations.  Loans  that  run  for 
years  thus  offset  annually  (in  their  accruing  interest)  a 
portion  of  the  exports  of  the  debtor  country.  An  excess  of 
exports  may  therefore  at  any  given  moment  indicate  either 
that  the  country  is  in  debt  or  that  it  is  getting  out  of  debt. 
An  excess  of  exports  is  generally  looked  upon  as  an  evidence 
of  national  prosperity;  but  it  is  absolutely  inconclusive  on 
the  point.  Finally,  after  all  the  items  of  imports  and  credit 
paper  purchased  abroad  are  set  opposite  the  items  of  exports 
and  promissory  papers  sold  abroad,  the  balance  is  paid  in 
gold  bullion  and  is  shipped  one  way  or  the  other.  Evidently 
the  amount  of  gold  shipped  is  but  a  small  fraction  of  the 
total  volume  of  transactions. 

Industrial  indebtedness  is  represented  in  various  forms: 
bills  of  lading  for  goods  shipped,  drafts  made  by  the  creditor 
on  his  debtor  for  goods  shipped  or  property  sold,  checks  or 
letters  of  credit  of  travelers,  bonds  and  notes  public  and 
private.  These  are  the  objects  dealt  in  by  the  bankers  who 
are  the  agents  to  carry  on  the  work  of  exchange. 

3.     The  territorial  distribution  of  money  is  both  a  deter- 


488      GENERAL  THEORY  OF  INTERNATIONAL  TRADE    [CH.  50 

Relations  of  mined  and  a  determining  factor  in  international  trade.  It 
national"  appears  to  be  determined  in  that  the  balance  of  all  accounts 
flow  of  for  or  against  the  country  must  be  settled  eventually  in 
flow  of°1  6  money-  After  any  such  a  settlement  one  country  has  less, 
money  the  other  more  money  than  before.  The  change  in  the  amount 
of  money  at  once  reacts  on  prices  and  becomes  a  determining 
factor  in  international  trade.  The  flow  of  money  out  of  a 
country  causes  money  to  tighten,  interest  rates  on  short 
loans  in  the  large  cities  to  stiffen,  and  prices  slightly  to  fall. 
When  prices  fall,  imports  decline,  as  the  country  is  not  so 
good  a  place  to  sell  in ;  when  prices  rise,  imports  increase,  as 
it  is  a  better  place  to  sell  in.  As  the  opposite  effect  is  pro- 
duced on  exports,  there  occurs  immediately  a  change  in  the 
quantity  of  money  which  continues  until  the  national  credits 
and  debits  balance  and  for  a  brief  time  remain  in  equili- 
brium. If  the  trade  of  a  country  with  its  neighbors  continued 
long  to  give  a  balance  of  imports  of  goods  and  of  debit  items 
(exclusive  of  money)  it  would  ultimately  be  drained  of  all 
its  coin,  and  would  default  payment  or  cease  to  import.  If 
the  trade  constantly  gave  a  balance  of  exports  and  credit 
items,  money  would  continue  to  flow  in,  until  prices  rose  to 
unexampled  heights.  In  fact  no  such  extreme  is  even  re- 
motely approached,  for  a  slight  movement  of  money  in  either 
direction  at  once  influences  prices  and  sets  in  motion  counter- 
acting forces.  Decade  after  decade  the  circulating  medium 
of  leading  countries  changes  only  slightly  in  amount,  and  the 
fluctuations  during  periods  of  so-called  "  favorable  balance 
of  trade"  and  of  "unfavorable  balance  of  trade"  represent 
only  the  smallest  fraction  of  the  value  of  goods  passing 
through  the  ports  of  the  country. 


§  III.   REAL  BENEFITS  OF  FOREIGN  TRADE 

1.  The  direct  advantages  of  foreign  trade  consist  in  the 
increased  efficiency  it  imparts  to  productive  forces.  In  ex- 
planation of  the  advantages  of  foreign  trade  it  is  said  to  be 


REAL  BENEFITS  OF   FOREIGN   TRADE  489 

a  vent  for  surplus  production  and  to  give  a  wider  market  Fallacious 
to  what  would  otherwise  go  to  waste.     This  involves  the   Jj^^J^e 
same  fallacy  as  the  "lump  of  labor,"  the  destruction  of  gains  from 
machinery,  and  the  praise  of  luxury.     If  backward  nations  forQi^trad 
now  give  a  vent  for  products  which  would  otherwise  rot  in 
the  warehouses,  at  length  a  time  will  come  when  the  world 
will  have  an  enormous  surplus  unless  neighboring  planets 
can  be  successively  annexed.    Again  it  is  said  that  the  great 
purpose  of  foreign  trade  is  to  keep  exports  in  excess  of 
imports  so  that  money  may  constantly  increase  in  amount. 
The  ideal  of  such  theorists  is  an  impossible  condition  where 
the  country  would  constantly  sell  and  never  buy.     In  the 
commercial  view  the  sole  object  of  foreign  trade  is  to  afford 
a  profit  to  the  merchants,  regardless  of  the  welfare  of  the 
mass  of  the  citizens. 

The  main  advantage  of  foreign  trade  is  the  same  as  that  The  real 
of  any  other  exchange.  It  is  hardly  necessary  to  review  the 
explanation  here:  the  increased  efficiency  of  labor  when  it  trade 
is  applied  in  the  way  for  which  each  country  is  best  fitted ; 
the  liberation  of  productive  forces  for  the  best  uses;  the 
development  of  special  branches  of  industry  with  increasing 
returns;  the  larger  scale  production  with  resulting  greater 
use  of  machinery  and  with  increased  chance  of  invention; 
the  destruction  of  local  monopolies. 

The  moral  and  intellectual  gains  of  foreign  commerce 
were  formerly  much  emphasized.  Commerce  is  an  agent  of 
progress ;  it  stimulates  the  arts  and  sciences ;  it  creates  bonds 
of  common  interest;  it  gives  an  understanding  of  foreign 
peoples  and  an  appreciation  of  their  merits ;  it  raises  a  com- 
mercial and  moral  barrier  to  war;  and  it  furthers  the  ideal 
of  a  world  federation,  the  brotherhood  of  man. 

2.     Free  foreign  trade  thus  has  in  its  favor  the  presump-   conflict  be 
tion  of  advantage  to  the  citizens;  but  various  interests  may  ^e^n 
be   adversely  affected.     The   general  attitude   of  economic  special  in- 
students  for  a  century  and  a  half  has  been  favorable  to  a  t 
large  measure  of  freedom  in  foreign  trade.     But  the  actual 


490      GENERAL   THEORY  OF  INTERNATIONAL  TRADE     [CH.  50 

practice  of  nations  is  opposed  to  the  principles  laid  down 
by  the  philosophers  and  accepted  by  nearly  all  serious  stu- 
dents of  the  question.  Germany  adopted  very  restrictive 
Prevalence  measures  under  Bismarck  in  1879  and  by  a  recent  law  has 
tariffs CCtiVe  discouraged  trade  still  further.  France,  Italy,  and  other 
smaller  nations  of  Europe  have  strong  protective  tariffs. 
The  United  States  has  followed  a  restrictive  policy  for  the 
last  century  almost  unvaryingly.  The  explanation  of  this 
contradiction  is  not  entirely  simple.  Free  trade  is  not  the 
most  desirable  thing  for  every  one.  Great  interests  are  af- 
fected by  foreign  trade  and  certain  of  these  interests  are 
able  to  dominate  legislation.  The  general  proposition  of 
free  trade  between  nations,  as  advocated  by  most  economists 
since  Adam  Smith,  is  rejected  by  a  majority  of  the  people, 
by  the  politicians,  and  by  the  legislators. 


CHAPTER  51 
THE    PROTECTIVE    TARIFF 

§  I.      THE    NATURE    AND    CLAIMS    OF    PROTECTION 

1.  A  protective  tariff  is  a  schedule  of  import  duties  so  Nature  of  a 
arranged  as  to  give  appreciably  more  favorable  conditions  tanfffor 
to  some  domestic  industries  than  they  would  enjoy  with  free 
trade.  Tariff  duties  were  first  laid  to  get  revenues  for  the 
government.  The  first  effect  of  the  tariff  is  the  same  as  that 
of  any  tax  that  enters  as  a  new  factor  into  enterpriser's 
cost— the  domestic  price  of  the  taxed  article  tends  to  rise. 
Other  results  then  follow.  If  the  article  cannot  be  produced 
within  the  country  (as  oranges,  spices,  and  coffee,  in  Eng- 
land, Norway,  and  Sweden),  its  consumption  is  reduced. 
The  lessening  of  demand  may  affect  somewhat  the  price  in 
the  producing  country  and  may  compel  the  foreign  producers 
to  sell  each  unit  for  less  than  before.  As  such  a  tariff  does 
not  increase  home  production,  it  is  for  revenue,  not  for 
protection. 

But  if  the  article  can  be  produced  in  the  importing  country  Effects  upon 
at  the  new  price,  "home  industries"  will  start.    If  the  whole  £°™e 
demand  at  home  is  thus  supplied,  imports  stop  and  there- 
with stop  all  revenues  to  the  government  from  that  source. 
This  is  a  prohibitive  or  completely  protective  tariff.     Most 
tariffs  combine  the  characters  both  of  revenue  and  protective 
measures.     Where  the  freight  charges  are  low  along  the 
coast  and  on  the  main  lines  of  transportation,  some  imports 
take  place;  while  farther  inland,  where  freight  charges  are 
high,  some  home  production  of  the  same  goods  takes  place. 

491 


492 


THE  PROTECTIVE   TARIFF 


[CH.  51 


The  begin- 
ning of  the 
tariff  under 
the  Consti- 
tution 


The  tariff 
controversy 
before  1865 


A  tariff  that  reduces  imports  but  does  not  cut  them  off 
entirely  is  either  a  revenue  tariff  with  incidental  protection 
or  a  protective  tariff  with  incidental  revenue.  The  differ- 
ence is  partly  one  of  legislative  intention,  partly  one  of  de- 
gree only. 

2.  The  tariff  question  has  fTeen  the  most  discussed  of 
economic  questions  in  American  politics.  The  tariff  bill 
passed  by  the  first  session  of  Congress  in  1789  was  primarily 
a  revenue  measure  with  rates  averaging  only  about  five  per 
cent.;  but  incidentally  it  was  protective  (as  most  tariffs 
are),  being  laid  on  imports  of  iron  and  cloth,  the  production 
of  which  had  been  undertaken  to  some  extent  before,  but 
which  thus  were  further  encouraged.  Between  1808  and 
1812,  the  United  States  and  England  were  in  constant  dis- 
agreement, and  our  government  repeatedly  laid  an  embargo 
on  British  commerce,  closing  our  ports  to  British  ships,  and 
British  ports  to  our  ships.  The  war  from  1812  to  1815 
almost  annihilated  American  trade  on  the  ocean.  Added  to 
this  discouragement  of  foreign  trade  was  the  high  tariff  im- 
posed, in  the  vain  effort  to  get  revenue  from  greatly  decreased 
imports.  Altogether  these  causes  almost  completely  stopped 
importation  and  forced  the  American  people  to  rely  on  their 
own  efforts  for  such  goods.  Some  industries  having  been 
"stimulated"  in  a  high  degree,  their  destruction  was  threat- 
ened by  the  repeal  of  the  high  war  tariffs.  Many  invest- 
ments and  interests  were  at  stake,  and  the  tariff  became  a 
most  important  question. 

The  first  period  of  real  discussion  of  the  protective  policy 
was  between  1816  and  1846.  The  result  of  the  first  twelve 
years  was  an  increase  of  the  tariff  rates  which,  in  1828, 
reached  a  high  point.  By  the  compromise  of  1832,  the  rates 
were  reduced  by  steps  till  1841.  Again  from  1842  to  1846 
was  a  brief  period  of  higher  duties,  followed  "by  a  policy 
which,  relatively  speaking,  was  one  for  revenue,  from  1846 
to  1860.  Again  in  the  Civil  War,  1861-65,  the  rates  were 
steadily  increased  without  much  discussion,  the  tariff  not 


§l]  THE  NATURE  AND  CLAIMS  OF   PROTECTION          493 

being  the  leading  question  at  a  time  when  the  prosecution 
of  the  war  was  absorbing  nearly  all  attention. 

The  latest  period  of  discussion  was  from  1874  to  1892.  Recent 
In  the  Tilden  and  Hayes  campaign  of  1876  the  tariff  was  ofthTteri 
made  the  leading  issue  and  the  advocates  of  a  lower  tariff 
were  very  nearly  successful.  In  1880,  protection  again  tri- 
umphed in  the  election  of  Garfield.  In  the  election  of  Cleve- 
land in  1884,  the  issue  of  tariff  reform  had  some  part,  but 
no  effective  legislation  on  the  subject  was  enacted  in  the 
next  four  years.  In  1888,  Cleveland  was  defeated  in  a  cam- 
paign fought  mainly  on  the  tariff  issue,  and  Harrison  was 
elected  as  a  pronounced  protectionist.  In  1892,  Cleveland 
was  reflected  on  the  issue  of  tariff  reform.  From  that  time, 
however,  there  has  been  a  lull  in  the  discussion  of  the  tariff 
question.  The  campaign  of  1892  was  the  last  presidential 
election  in  which  the  tariff  was  the  dominant  issue.  Since 
1896,  the  money  question  and  imperialism  have  quite  crowded 
the  tariff  issue  off  the  stage.  • 

3.  A  leading  argument  in  favor  of  a  protective  tariff  is  The 
that  by  encouraging  an  excess  of  exports  it  maintains  a  ^rade"" 
favorable  balance  of  trade.     This  notion  of  the  favorable  argument 
balance  of  trade  appears  in  several  forms.     One  of  these, 
already  discussed  in  connection  with  foreign  exchanges,  is 

that  the  exports  of  a  country  in  the  form  of  merchandise 
must  exceed  the  imports  if  the  country  is  to  prosper.  The 
ideal  cherished  is  to  keep  more  merchandise«constantly  flow- 
ing out  of  the  country  than  comes  in.  An  interesting  com- 
mentary on  this  delusion  is  the  fact  that  this  is  the  usual 
situation  in  poor  debtor  countries  having  constant  interest 
payments  to  meet;  while  the  opposite  of  the  ideal  is  the  sit- 
uation in  rich  creditor  countries.  England  for  many  years 
in  the  period  of  her  greatest  prosperity  has  had  a  constant 
excess  of  imports,  these  being  goods  to  the  value  of  the  in- 
terest payments  due  to  Englishmen  from  investments  abroad. 

4.  Another  argument  is  that  the  protective  tariff  keeps 
money  at  home  which,  if  trade  is  free,  will  be  sent  abroad  to 


494  THE  PROTECTIVE   TARIFF  [CH.  51 

"To keep      buy  foreign  goods,  thus  impoverishing  the  country.     This 

home3"**  *s  *ke  "favorable  balance  of  trade"  argument,  with  the  em- 
phasis on  money  rather  than  on  goods.  A  superficial  glance 
at  the  trade  relations  of  an  old  and  rich  country  with  a  new 
province  seems  to  give  evidence  for  such  a  belief.  The  older 
country  is  lending  capital  (which  it  sends  to  the  debtor 
country  in  the  form  of  goods)  and  it  has  at  the  same  time 
a  larger  supply  of  money.  These  two  facts— the  lack  of 
money  and  the  poverty  of  the  newer  country — are  looked 
upon  by  the  protectionist  as  due  to  the  importation  of  goods. 
The  real  cause  of  the  imports  to  the  newer  country  and  of  its 
scanty  money-supply,  it  need  hardly  be  said,  is  its  compara- 
tive poverty.  Europe  and  the  United  States,  in  their  trade 
with  China  and  South  America,  do  not  get  gold  in  exchange, 
but  merchandise  of  various  sorts.  It  is  true  that  in  the  trade 
of  England  and  New  York  with  great  gold-producing  dis- 
tricts, such  as  California,  South  Africa,  and  Alaska,  gold  is 
received  in  return  for  merchandise,  for  to  these  districts 
gold  is  merchandise  and  its  export  does  not  drain  them  of 
their  supply.  The  richer  states  in  the  Union  do  not  drain  the 
poorer  states  of  money.  A  few  years  ago  the  states  of 
Kansas,  Nebraska,  Iowa,  and  their  neighbors  were  filled  with 
resentment  against  the  money-lenders  of  the  Eastern  states. 
There  was  a  widespread  belief  that  hard  times  were  due  to 
an  insufficient  currency.  Attempted  action  took  the  form 
of  the  greenback;  and  free-silver  movements,  which  were  de- 
feated by  the  opposition  of  the  East,  but  there  can  be  little 
doubt  that  if  the  Federal  Constitution  had  not  forbidden 
it,  the  discontented  states  would  have  established  a  protec- 
tive tariff  "to  keep  their  money  at  home."  Few  advocates 
of  protective  tariffs  are  ready  to  admit  that  the  money-supply 
of  the  country  is  dependent  on  the  general  wealth  of  the 
country,  and  on  the  methods  of  doing  business,  rather  than 
on  a  protective  tariff. 

The  "two         5.     It  is  said  that  the  tariff  keeps  "two  profits"  at  home. 

argument      foreign  trade  gives  but  one.     The  word  "profits"  is  here 


$lj  THE  NATURE  AND  CLAIMS  OF  PROTECTION          495 

used  in  the  popular  sense  of  gain  from  a  single  transaction. 
This  argument  becomes  somewhat  confused,  for  certainly  in 
the  admission  that  there  are  "two  profits"  in  a  trade,  the 
notion  that  "one  man's  gain  is  another's  loss"  is  rejected. 
Both  parties  are  said  to  profit  and  both  profits  are  thought 
to  be  secured  at  home  when  two  citizens  are  forced  to  trade 
with  each  other.  There  is  an  error  in  elementary  arithmetic 
here,  both  as  to  the  number  and  as  to  the  aggregate  amount 
of  profits.  The  purpose  of  a  protective  tariff  is  to  compel 
two  of  the  citizens  of  a  country  to  trade  with  each  other 
instead  of  trading  with  two  citizens  of  a  foreign  state;  the 
number  of  profits  is  therefore  not  increased  by  substituting 
domestic  for  foreign  trade.  What,  then,  as  to  the  size  and 
aggregate  amount  of  the  profits?  The  margin  of  advantage 
is  not  the  same  on  all  exchanges;  the  exchange  is  made  if 
there  is  a  margin  to  both  parties,  no  matter  how  small  it  is ; 
but  the  generous  "profit"  on  one  transaction  where  the 
conditions  of  the  two  parties  are  very  different  may  be 
greater  than  the  total  of  petty  margins  on  a  dozen  exchanges 
between  two  traders  of  evenly  matched  powers.  Can  it 
safely  be  assumed  that  every  trade  with  a  foreigner  is  less 
advantageous  than  one  with  a  fellow-citizen  ?  JHamond  cuts 
diamond,  but  two  shrewd  Yankees  left  to  themselves  surely 
should  not  be  worsted  in  bargains  with  the  universe.  If 
they  could  exchange  to  better  advantage  with  each  other 
they  probably  would  discover  it  as  soon  as  the  interested 
manufacturers  and  political  orators  who  can  prove  so  elo- 
quently that  they  know  the  other  man 's  business  better  than 
he  knows  it  himself.  Forcing  the  home  trade  is  doubtless 
to  the  advantage  of  one  citizen,  but  it  is  not  likely  to  be  to 
the  advantage  of  both  citizens. 

6.     The  most  effective  popular  argument  for  protection   The  claim 
is  that  it  raises,  or  maintains,  the  general  scale  of  wages  in  UU^jJ^ 
the  country.     This  argument  is  two-fold :  first,  when  wages  wages 
are  low  in  a  country  it  is  claimed  that  a  tariff  is  needed  to 
raise  them ;  and,  secondly,  when  wages  are  high  it  is  argued 


496 


THE  PROTECTIVE   TARIFF 


[CH.  51 


that  a  tariff  alone  can  preserve  them.  In  Germany  the  fear 
is  of  the  higher  paid  and  more  efficient  labor  of  England. 
In  America,  where  wages  at  all  times  have  been  higher  than 
in  England,  it  was  first  argued  that  because  of  the  greater 
cost  of  production,  due  to  high  wages,  the  tariff  was  needed 
to  start  certain  industries ;  but  after  the  tariff  had  long  been 
established  and  the  old  argument  had  been  forgotten,  it  was 
said  that  the  tariff  was  the  cause  of  the  high  wages  and 
must  be  maintained  to  protect  against  the  (so-called) 
"pauper"  labor  of  the  older  countries.  That  wages  gen- 
erally are  higher  in  new  countries  and  where  a  tariff  prevails 
is  always  claimed  to  be  one  of  the  chief  fruits  of  a  protective 
policy.  The  cause  of  the  high  wages  in  America  appears  to 
be  the  productive  efficiency  of  industry  under  existing  con- 
ditions. Labor  is  surrounded  here  with  advantages  in  the 
forms  of  rich  natural  resources  and  of  mechanical  appliances 
such  as  never  before  were  combined.  Because  of  the  scarcity 
of  workers  in  particular  protected  industries,  wages  may  be 
higher  in  them  than  in  some  other  industries;  but  such 
workers  form  a  small  fraction  of  the  population.  The  claim 
that  the  general  scale  of  wages  in  all  occupations  is  raised 
by  the  tariff  protecting  this  fraction,  is  no  less  invalid  than 
the  sweeping  claims  in  favor  of  trade-unions. 


Political 
arguments 
for  pro- 
tection 


§  II.      THE  REASONABLE   MEASURE   OF   JUSTIFICATION   OF 
PROTECTION 

1.  For  military  and  political  reasons  an  otherwise  un- 
economic tariff  may  be  justified.  It  usually  is  admitted  by 
the  believers  in  free  trade  that  in  the  interest  of  diplomacy, 
to  secure  proper  concessions,  tariffs  may  sometimes  be  lev- 
ied. Even  in  England,  where  protective  arguments  long 
have  had  little  acceptance,  Mr.  Chamberlain,  with  his  eye  on 
a  tariff  union  and  imperial  federation  of  England  and  her 
colonies,  has  been  advocating  this  policy.  In  such  a  case 
there  is  no  pretense  that  the  justification  of  the  tariff  is 


§11]  THE  MEASURE  OF   ITS  JUSTIFICATION  497 

its  immediate  economic  advantages;  it  is  an  expenditure 
for  ultimate  gain.  By  the  same  argument  a  protective 
tariff  is  upheld  as  a  means  of  defense — to  encourage  the 
building  of  ships,  arsenals,  and  factories  for  munitions.  It 
is  always  questionable  whether  an  outright  expenditure 
would  not  be  better,  whether  the  government  cannot  build 
its  own  arsenals,  ship-yards,  etc.,  more  cheaply  than  it  can 
foster  private  enterprise  by  means  of  a  tariff. 

2.  Protection  may  be  defended  as  encouraging  infant  in-  Themfant- 
dustries  and  thus  diversifying  the  industries  of  the  country. 
Most  free-trade  writers  concede  a  limited  validity  to  this 
argument.  If  the  natural  resources  of  a  land  are  adapted 
to  an  industry,  it  may  be  called  into  being  early  by  a 
fostering  protective  tariff.  This  is  merely  anticipating  and 
hastening  the  natural  order  of  progress.  In  the  American 
colonies  the  manufactures  of  iron,  cloth,  hats,  ships,  and 
furniture  sprang  up  not  only  without  ''protection,"  but 
despite  numerous  harassing  trade  restrictions  made  in  the 
interest  of  the  English  merchants;  and  they  continued  in 
some  cases  despite  their  absolute  prohibition  by  Parliament. 
Can  it  be  doubted  that  many  of  these  industries  would  have 
developed  and  flourished  in  America  under  no  other  fos-  Applied  to 
tering  influences  than  those  of  rich  resources  and  of  economy  Amenca 
in  freights?  The  growth  of  industries  in  the  Middle  West 
in  the  last  twenty-five  years  has  been  phenomenal.  The  dis- 
covery of  natural  gas  and  the  presence  of  abundant  coal,  ore, 
and  timber  have  enabled  them  to  develop  without  protection 
against  the  Eastern  states.  Industries  capable  of  eventual 
self-support  must  in  most  cases  naturally  appear  in  due 
time.  Economic  forces  will  bring  them  out.  It  is  a  trite 
but  valid  remark  that  protective  tariffs  are  often  like  hot- 
house culture,  anticipating  the  season  by  a  few  weeks  and 
at  great  cost.  The  question  is  whether  the  mere  posses- 
sion of  the  hothouse  is  a  luxury  worth  the  price,  if  meantime 
the  products  can  be  gotten  more  cheaply  by  exchange. 
English  manufactures  flourished  because  they  were  well  es- 


498  THE  PROTECTIVE   TARIFF  [OH.  Si 

tablished,  had  excellent  coal  supplies,  great  stores  of  iron 
ore,  and  low-paid  labor  which  did  not  have  the  opportunity 
of  better  alternatives,  as  did  the  American  workman.  If 
America  had  imported  more  (it  would  not  have  been  all)  of 
her  iron  and  coal,  the  English  mines  would  have  been  ex- 
hausted earlier,  and  America's  advantage  surely  would  have 
asserted  itself  in  time.  Her  iron  manufactures  undoubtedly 
were  hastened— they  cannot  truly  be  said  to  have  been  cre- 
ated—by the  protective  tariff. 

social  effects  Industries  are  forced  into  an  earlier  diversification  by 
tariffs.  The  peculiar  advantages  of  a  new  country  attract 
labor  and  enterprise  into  a  few  lines.  Is  it  an  evil?  Con- 
trast Iowa,  Dakota,  and  Minnesota,  or  Kansas,  if  you  please, 
with  New  York  and  Pennsylvania.  Is  it  so  certain  that  a 
dense  population  congested  in  cities  and  crowded  in  factories 
and  mines  is  a  more  ideal  social  aggregation  than  is  a  com- 
munity of  prosperous  farmers?  The  smoky  industrialism 
fostered  by  protection  often  puts  a  premium  on  a  low  grade 
of  immigrant  and  keeps  him  an  alien  to  the  American 
spirit.  It  would  be  surprising  if  Americanism  on  the  Western 
plains  were  not  as  good  as  in  the  Eastern  cities.  But  the 
infant-industry  argument  appeals  strongly  to  the  enterprise 
and  the  speculative  spirit  of  Americans,  who  like  to  do  all 
things  rapidly  and  on  a  large  scale.  Every  village  aspires 
to  be  a  great  industrial  center.  Americans  are  impatient 
of  the  suggestion  that  things  "will  come  in  time";  they  like 
things  to  come  at  once. 

The  "home-  3.  The  tariff  develops  a  home  market  for  the  products 
of  agriculture.  It  has  been  especially  hard  to  reconcile  the 

as  to  farmers  in  America  to  the  tariff.     While  in  England  the 

freights  protection  that  existed  before  1846  was  almost  entirely  for 
the  benefit  of  the  landholding  interests,  the  tariff  in  Amer- 
ica has  been  peculiarly  favorable  to  manufactures.  The 
"home-market"  argument  is  the  protectionist  appeal  that 
has  proved  most  effective  with  the  American  farmers.  This 
argument,  which  takes  on  several  aspects,  is  akin  to  the 


$ll]  THE  MEASURE  OF  ITS  JUSTIFICATION  499 

"  two-profits  "  argument  when  it  declares  that  the  shipping  of 
food  to  Europe  and  the  importing  of  manufactures  involve 
a  great  cost  for  freight  which  could  be  saved  by  manufactur- 
ing "at  home."  Of  course  the  farmer  is  supposed  to  pay 
this  cost,  although  there  is  nothing  in  the  argument  to  show 
that  it  is  not  all  paid  by  the  European,  either  the  manu- 
facturer or  the  food  consumer.  Home  trade  ' '  saves  the 
freights ' '  for  the  farmer  only  in  case  he  can  buy  goods  under 
a  tariff  with  less  of  his  own  labor  and  products  than  under 
free  trade.  The  payment  of  freight  charges  is  true  econ- 
omy when  the  goods  can  be  bought  at  a  distance  on  more 
favorable  terms  than  near  home.  The  freight-argument 
proves  too  much,  for  it  condemns  every  exchange,  within  the 
country,  of  goods  produced  a  stone's  throw  away  from  the 
consumer. 

Again,  the  home-market  argument  dwells  on  the  greater  Astosecur- 
steadiness  of  domestic  trade.     War  or  political  changes,  it  ityof 
is  said,  may  change  the  demand  for  products.    This  is  true, 
but  no  other  changes  have  affected  American  agriculture 
so  radically  as  the  peaceful  development  of  domestic  trans- 
portation and  the  opening  of  the  West. 

The  home-market  argument  is  strongest  when  addressed,   AS  to  the 
not  to  all  farmers,  but  to  one  class  of  farmers,  those  whose   J*1"60* 

farm-lands 

lands  are  situated  nearer  the  manufacturing  cities.  The 
higher  value  taken  on  by  land  as  it  is  converted  from  the 
extensive  cultivation  of  corn  and  wheat  to  dairying,  fruit, 
and  market-gardening,  is  pointed  to  as  a  benefit  of  pro- 
tection. The  decaying  agriculture  and  deserted  farms 
throughout  the  great  industrial  states  during  the  past 
twenty-five  years  are  pathetic  evidence  that  this  benefit  has 
failed  to  come  to  the  average  farmer  just  where  it  should  be 
most  expected.  There  is,  however,  a  partial  validity  in  the 
argument  as  applied  to  a  comparatively  small  number  of 
farmers,  who  gain  as  landholders,  not  as  tillers  of  the  soil. 

4.     The  tariff  may  keep  some  of  the  natural  resources  of 
a  new  country  from  becoming  quickly  exhausted.     The  ex- 


500 


THE   PROTECTIVE   TARIFF 


[CH.  51 


Exports  and  port  of  food  takes  out  of  the  soil  and  out  of  the  country 
o7theUsoiin  fertile  qualities  never  to  be  returned.  The  shipment  of 
several  hundred  million  dollars  of  food  products  year  after 
year  represents  a  tremendous  drain  from  the  soil  of  the 
United  States.  The  assumption,  however,  that  the  use  of  the 
food  in  this  country  would  preserve  the  fertility  of  our  own 
fields  has  been  in  the  main  mistaken.  The  fertile  material 
in  the  food  shipped  for  human  consumption  five  miles  away 
from  the  field  is  almost  absolutely  lost.  Engineering  skill 
has  as  yet  succeeded  in  saving  hardly  a  fraction  of  the  fertile 
organic  matter  that  flows  into  the  sewers,  that  is  dumped  into 
river  and  ocean,  and  that  is  buried  in  heaps  at  the  borders  of 
our  cities.  On  the  other  hand,  the  increased  use  of  iron,  coal, 
and  timber,  as  a  result  of  encouraging  manufactures,  has 
very  effectually  aided  in  exhausting  the  natural  resources 
of  the  country. 

5.  A  new  country  has  a  limited  potential  monopoly  in  cer- 
tain kinds  of  products;  a  tariff  may  make  it  effective.  The 
opening  up  of  a  new  country  with  rich  natural  resources  may 
be  a  great  gain  to  the  average  consumer  in  the  older  countries, 
although  it  causes  a  loss  to  a  special  class  of  landowners. 
Whether  the  citizens  of  the  older  or  of  the  newer  country 
shall  reap  the  greater  benefit  in  the  trade  depends  on  the  re- 
ciprocal demand  for  the  two  classes  of  goods,  as  was  seen 
in  discussing  the  equation  of  international  demand.  A  wide 
margin  of  advantage  may  go  to  one  party  and  a  narrow 
margin  to  the  citizen  of  the  more  favored  land.  To  put  it 
concretely:  if  America,  having  great  natural  resources  for 
agriculture,  continues  to  exchange  food  for  manufactures  up 
to  the  narrowest  margin  of  advantage,  England  reaps  most 
of  the  benefits  of  the  trade.  An  American  tariff  on  manufac- 
tures from  England  will,  under  such  conditions,  check  the 
demand  for  English  products  and  compel  some  Americans 
to  leave  farming.  This  reduction  of  the  American  supply 
of  wheat  or  corn  and  of  the  American  demand  for  English 
manufactures  compels  a  new  ratio  of  exchange.  It  is  con- 


Protection 
as  a  mon- 
opoly mea- 
sure 


§111]  VALUES  AS  AFFECTED   BY  PROTECTION  501 

ceivable  that  exchanging  fewer  goods  at  a  larger  margin  of 
advantage,  will  give  a  larger  total  of  gain  to  the  favored 
nation.  Thus,  by  the  shifting  of  the  ratio  of  exchange, 
foreigners  may  be  compelled  to  pay  a  part  of  the  tariff  to 
enjoy  the  favored  market.  This  is  but  a  special  case  of  the 
monopoly  principle;  the  government  by  law  artificially  lim- 
its the  supply  of  goods  offered  by  its  citizens. 

This  argument  is  somewhat  subtle,  but  probably  is  the   Limited 
soundest  one  in  the  theory  of  protection.     The  supposed  ™v^ges 
conditions  seldom  occur,  but  they  may  exist,  and  probably  of  America 
have  existed  in  America.    When  the  great  system  of  internal 
transportation  was  developed  in  the  United  States  before 
that  of  the  other  new  countries,  this  country  had  such  pe- 
culiar advantages  for  the  production  of  food  that  the  quan- 
tity was  enormously  increased  and  the  prices  fell.    At  such 
a  time  the  tariff  may  work  toward  retarding  the  unfavorable 
turn  in  the  ratio  of  exchange  and  toward  reestablishing  early 
a  more  favorable  ratio.    But  the  limited  application  of  the 
principle  must  be  recognized.    The  potential  competition  of 
undeveloped  countries  on  all  sides,  seeking  to  develop  their 
resources,  to  raise  their  own  food,  and  to  profit  by  the  higher 
prices  in  the  world-market  caused  by  the  tariff,  threaten  the 
peculiar  advantages  of  the  favored  land.     A  great  nation  I 
with  its  manifold  interests  is  not  eminently  fitted  to  practice  | 
the  gentle  art  of  monopoly. 

§  III.   VALUES  AS  AFFECTED  BY  PROTECTION 

1.  An  increase  of  the  tariff  is  favorable  to  many  capital-  influence  on 
ists  and  to  many  oivners  of  natural  resources.  A  denial  of 
large  general  advantages  in  protection  is  not  the  denial  of 
all  its  influence  on  value.  On  the  contrary,  it  cannot  be  too 
strongly  emphasized  that  manifold  interests  are  affected  by 
the  tariff.  Owners  of  natural  mineral  resources  are  among 
the  first  to  benefit.  When  the  price  of  iron  is  low,  many 
iron-  and  coal-mines  may  yield  no  rent  and  have  small  pros- 


502 


THE  PROTECTIVE  TARIFF 


[CH.  51 


pective  values.  A  tariff  forcing  home  production  opens  the 
marginal  resources  and  gives  them  a  large  capital  value. 
Factory  sites  and  surrounding  lands  leap  from  the  level  of 
rural  prices  to  that  of  city  real  estate.  The  owners  of  farms 
situated  near  the  new  industries  have  a  home  market  and 
get  scarcity  prices,  as  they  alone  can  supply  the  needed 
fresh  vegetables  and  dairy  products.  Wealth  less  favorably 
situated,  however,  is  in  many  cases  depressed  in  value  be- 
cause its  products  exchange  for  smaller  amounts  of  other 
products. 

2.  A  tariff  is  immediately  favorable  to  some  enterprises 
and  to  special  classes  of  workmen.    Enterprisers  already  ac- 
quainted with  and  engaged  in  a  business  always  may  hope 
to  gain  by  the  higher  prices  immediately  following  a  rise 
in  the  tariff  rates  on  their  particular  products.    Though  they 
are  granted  no  enduring  monopoly  by  the  protection,  they 
for  the  time  enjoy  the  advantage  of  being  on  the  ground  and 
reap  the  first  fruits  of  the  favoring  conditions.     The  enter- 
priser usually  profits  when  the  price  of  his  product  suddenly 
rises.    Usually  skilled  workmen  are  affected  slowly  by  com- 
petition when  there  is  any  considerable  increase   of  their 
special  industry.     The  burden  of  higher  prices  is  very  soon 
distributed  to  a  number  of  less  favored  citizens.    A  part  of 
it  may  be  borne  by  the  retail  merchant,  a  part  by  his  cus- 
tomers.   The  weight  falling  on  each  is  usually  small,  often 
unsuspected,  always  hard  to  measure.    The  increased  benefit 
is  concentrated  in  a  few  industries  and  accrues  to  a  com- 
paratively few  producers.     Here  is  a  recipe  for  riches:  get 
everybody  to  give  you  a  penny;  they'll  not  miss  it,  and  it 
will  mean  a  great  deal  to  you.    Something  like  this  happens 
in  the  case  of  many  protected  industries ;  every  consumer  of 
the  article  pays  a  penny  more,  a  few  wage-earners  gain,  and 
a  few  enterprisers  wax  wealthy. 

3.  A  sudden  reduction  of  the  tariff  causes  local  crises 
and  may  bring  on  a  general  crisis.    The  repeal  of  the  tariff 
works  in  a  direction  the  reverse  of  its  enactment.    The  ben- 


§lll]  VALUES  AS  AFFECTED  BY  PROTECTION  503 

efits  of  the  lower  prices  are  diffused ;  the  immediate  injury  is 
concentrated  and  acute.  Factories  are  closed,  capital  is  de- 
preciated, labor  is  thrown  out  of  employment.  The  organic 
nature  of  local  industry  causes  the  evil  to  be  felt  by  many 
classes.  Merchants,  professional  men,  servants,  and  skilled 
laborers  that  are  tributary  to  the  depressed  industry,  suffer. 
The  effects  are  transmitted  to  commercial  and  financial  cen- 
ters and  credit  is  shaken.  The  readjustment  of  industry  is 
slow  and  much  capital  is  lost  in  the  process. 

It  is  rarely  appreciated  how  great  is  the  tactical  advantage  The  two 
enjoyed  in  political  contests  by  the  advocates  of  a  high  tariff.  ^j^i"1 
They  can  so  easily  impress  the  popular  judgment  with  the  discussion 
evident  fruits  of  their  own  policy,  and  with  the  immediate 
dangers  of  the  policy  of  their  opponents.  The  low-tariff 
advocates  in  America  undoubtedly  have  made  the  mistake 
of  underestimating  or  of  quite  overlooking  these  immediate 
effects.  They  have  been  too  abstractly  doctrinaire,  and  have 
argued  too  absolutely  for  the  merits  of  free  trade.  They 
have  opposed  one  extreme  system  by  another,  with  no 
thought  of  the  inexpediency  and  injustice  of  sweeping 
changes.  There  is  a  strong  feeling  among  business  men  that 
any  tariff,  be  it  high  or  low,  is  better  than  a  shifting  policy. 
Despite  the  great  preponderance  of  domestic  production  over 
foreign  trade,  it  is  perhaps  too  much  to  say  that  the  tariff 
is  unimportant  in  our  present  conditions.  It  can,  however, 
be  said  that  the  tariff  agitation  has  taught  that  radical 
changes,  especially  sudden  and  large  reductions,  are  fraught 
with  evils,  and  that  business  can  adjust  itself  in  large  mea- 
sure to  any  settled  conditions.  The  future  of  the  tariff  dis- 


cussion in  America  is  hard  to  prophesy.    The  infant-industry  / 


argument  now  is  of  little  force.    With  the  widening  of  our 


international   relations   are   growing  interests   favorable  to 
reciprocity  or  to  other  freer  trade  relations. 


CHAPTER  52 

OTHER    PROTECTIVE    SOCIAL    AND    LABOR 
LEGISLATION 

§  I.      SOCIAL   LEGISLATION 

1.  Under  modern  conditions  many  laws  restricting  free 
competition  are  required  to  secure  the  health  and  conve- 
nience of  the  citizens.  The  rapid  growth  of  city  populations 
has  brought  new  social  and  economic  problems.  The  friction 
in  social  relations  is  greater  when  men  are  crowded  together. 
In  1790,  three  per  cent,  only  of  our  population  lived  in  cities 
of  over  eight  thousand ;  to-day  the  percentage  is  thirty-three. 
Then  the  city  dwellers  numbered  one  hundred  and  thirty-one 
thousand ;  now  they  number  twenty-five  millions.  Then  there 
were  but  six  cities  of  eight  thousand  or  over;  now  there  are 
five  hundred  and  forty-five.  Then  the  largest  city  (Philadel- 
phia) numbered  fifty  thousand  persons;  to-day  the  largest 
city  (New  York)  numbers  three  millions.  Many  laws  are 
survivals  suited  only  to  the  older  rural  conditions.  In  Lon- 
don, these  problems  were  first  forced  into  prominence,  and  a 
law  passed  after  the  great  fire  of  1665  to  regulate  the  rebuild- 
ing of  houses,  streets,  sidewalks,  and  sewers,  foreshadowed 
alike  the  American  law  of  special  assessments  and  the  mod- 
ern tenement-house  legislation.  A  mass  of  laws  wise  and 
foolish  has  resulted  from  the  attempt  to  meet  the  new  con- 
ditions. The  laws  of  nuisance  and  of  sanitation  have  been 
rapidly  changing. 

Why  not  leave  such  subjects  to  individuals  ?  It  is  for  the 
interest  of  every  one  that  his  back  yard  should  not  be  a 

504 


§1]  SOCIAL  LEGISLATION  505 

place  of  noisome  smells  and  disagreeable  sights.  (But  men 
are  at  times  strangely  obstinate,  selfish,  and  neglectful,  and 
through  one  man 's  fault  a  whole  community  may  suffer.  The 
refusal  of  one  man  to  put  a  sewer  in  front  of  his  house 
would  block  the  improvement  of  a  whole  street.  The  ob- 
stinacy of  one  may  bring  an  epidemic  upon  an  entire  city. 
There  must  be  a  plan,  and  by  law  the  will  of  the  majority 
must  be  imposed  upon  the  unsocial  few.  Where  voluntary 
cooperation  fails,  compulsory  cooperation  often  is  necessary. 
Thus  health  laws,  tax  laws,  and  improvement  laws  regulate 
many  of  the  acts  of  citizens,  limit  the  use  of  property,  and 
compel  men  to  a  course  against  their  own  wishes  and  judg- 
ments. The  justification  for  these  limitations  on  the  right 
of  private  property,  on  free  choice  of  the  individual,  on 
"free  competition, "  must  be  found  in  the  social  result 
secured. ) 

2.     Tenement-house  legislation  is  an  important  recent  ex-  Tenement- 
pression  of  this  social  protective  policy.    As  city  population  J^J^WS 
grows  denser,  land  increases  in  value,  and  the  evils  of  bad 
housing  threaten  the  welfare  of  the  great  majority  of  city 
dwellers.     Light,  sun,  air  are  shut  out,  and  cleanliness,  de- 
cency, and  home  life  are  made  impossible.    Two  policies  are 
open  to  the  public.     It  may  be  left  to  private  enterprise  to 
solve  the  problem.     If  the  tenant  agrees  to  rent  a  disease- 
breeding  house,  he  is  the  first  to  suffer.     The  interests  of 
investors,  it  is  said,  will  supply  as  good  a  house  as  each  tenant 
can  pay  for.    The  other  policy  now  adopted  is  to  set  a  mini- 
mum standard  of  sanitation  and  comfort,  to  which  all  builders 
and  owners  must  attain.    Property  owners  are  no  longer  left 
free  to  determine  plans,  height  of  building,  proportion  of 
lot  built  on,  lighting,  materials,  and  workmanship.    Comply- 
ing with  the  legal  requirements,  they  are  left  quite  free  to 
collect  whatever  rent  they  can  get.    Such  legislation  is  partly  interests 
in  the  interest  of  the  body  of  landowners  as  against  the  a£fected 
selfish  desires  of  some  individuals.     One  bad  building  may 
bring  down  the  rent  of  all  on  the  street.     Partly,  however, 


506 


OTHER  PROTECTIVE  LEGISLATION 


LCH.  52 


Public 
inspection 
of  goods 
used  in  the 
homes 


the  regulation  is  in  the  interest  of  the  tenants  and  of  society 
as  a  whole,  and  against  that  of  the  landlord.  The  rents  from 
slum  property  are  threatened;  hence  the  strong  opposition 
always  manifested  against  tenement-house  legislation  by  some 
landlords,  architects,  and  contractors,  who  fight  it  bitterly 
as  an  interference  with  their  interests  and  as  a  confiscation 
of  their  property.  It  is  not  quite  certain  how  marked  will 
be  the  effect  of  this  policy  in  making  the  rents  too  high  for 
the  poorer  tenants  and  driving  them  into  the  country.  But 
this  result,  predicted  by  the  enemies  of  the  policy,  is  not 
so  undesirable,  and  the  enlightened  sentiment  of  the  public 
to-day  favors  all  efforts  to  destroy  the  breeding-places  of  dis- 
ease, misery,  and  crime. 

3.  Laws  forbid  adulteration  of  products  for  domestic 
use  and  provide  for  public  inspection.  English  laws  of  the 
Middle  Ages  forbade  false  measures  and  the  sale  of  defective 
goods,  and  provided  for  the  inspection  of  markets  in  the 
cities.  Recent  legislation  in  many  lands  has  developed  much 
further  the  policy  of  insuring  the  purity  or  the  safety  of 
articles  consumed  in  the  home.  The  oleomargarin  law 
passed  by  Congress  was,  however,  designed  as  protective 
legislation  in  the  interest  of  the  farmer.  Usually,  the  self- 
interest  of  the  purchaser  is  the  best  safeguard  for  the  quality 
of  goods;  but  personal  inspection  by  each  buyer  frequently 
is  difficult  and  time-consuming,  requiring  special  and  un- 
usual knowledge  of  the  products,  and  special  costly  testing 
apparatus.  The  state  undertakes,  therefore,  to  set  a  min- 
imum standard  of  quality,  and  to  apply  it  by  the  economical 
method  of  social  cooperation.  This  policy  extends  only  to 
staple  products  and  to  a  comparatively  few  articles.  It 
would  be  impossible  as  well  as  unwise  to  apply  it  to  art 
products,  except  to  protect  the  morality  of  the  community. 
This  inspection  sometimes  raises  the  price,  but  the  evils  are 
small  compared  with  the  convenience  and  the  benefits  re- 
sulting to  the  citizen.  He  is  assured  that  the  article  he 
Buys  is  of  standard  quality,  and  if  he  wishes  a  cheaper 


§IJ  SOCIAL  LEGISLATION  507 

quality  there  is  no  law  to  prevent  his  adulterating  it  for  his   state 

4.  Other  kinds  of  social  amelioration  undertaken  by  the 
state,  through  free,  compulsory  education,  charity,  and  tem- 
perance legislation,  are  likewise  interferences  with  competi- 
tion and  freedom  of  contract.  Many  of  these  are  so  custom- 
ary that  they  are  not  thought  of  in  this  light.  Schools  are 
productive  enterprises,  education  is  industry,  and  the  supply 
of  this  service  is  always  in  large  measure  undertaken  by 
private  enterprise  and  could  be  left  entirely  to  it.  But  free 
elementary  education  is  the  established  policy,  and  is  no 
longer  debatable  in  America  and  France.  In  England  the 
policy  is  still  debated,  much  as  is  that  of  public  ownership  of 
trolley  lines  in  America.  One  by  one  the  states  are  passing 
compulsory  education  laws,  and  thus  interfering  still  further 
with  the  freedom  of  the  individual.  The  affection  of  parents 
can  in  most  cases  be  trusted  to  provide  for  the  education 
of  children,  but  when  family  affection  fails,  the  child  and 
the  state  are  the  victims  of  the  resulting  ignorance,  crime, 
and  pauperism.  State  support  of  higher  education  is  more 
in  dispute.  It  is  a  universally  accepted  view  that  social 
welfare  requires  a  more  generous  support  for  higher  educa- 
tion than  could  be  secured  if  it  were  sold  at  a  competitive 
price;  but  while  in  eastern  America  its  provision  is  left 
mainly  to  private  gifts,  in  the  West  and  South  it  is  under- 
taken largely  by  the  state.  The  justification  of  this  policy 
must  be  found,  not  in  the  benefit  to  the  particular  students, 
but  in  the  benefit  diffused  throughout  the  commonwealth 
by  the  encouragement  of  science,  arts,  and  letters. 

The  system  of  public  relief  for  the  defective  classes  of 
blind,  deaf,  insane,  feeble-minded,  and  paupers,  are  examples  chanty 
of  the  social  protective  policy.    The  public  interest  undoubt- 
edly is  served  by  having  these  suffering  classes  systemati- 
cally relieved,  but  the  extent  and  nature  of  the  provision 
are  questions  ever  in  debate.     Still  more  debated  is  temper-   Temperance 
ance  legislation,  both  as  to  licensing  and  as  to  prohibiting  the   legislation 


508 


OTHER  PROTECTIVE   LEGISLATION 


[CH.  52 


Other  laws 
to  protect 
public 
morals 


Usury  laws 
as  social 
legislation 


liquor  traffic.  Nowhere  is  the  manufacture  and  sale  of 
intoxicating  liquor  treated  quite  like  the  traffic  in  most  other 
goods,  because  it  is  recognized  that  the  public  interest  is 
affected  in  a  different  way.  While  it  is  beyond  question  that 
society  should  protect  itself  against  the  drunkard,  it  is  more 
doubtful  whether  it  owes  to  the  man,  for  his  sake,  protec- 
tion against  his  own  blunders.  Not  even  the  gods  can  save 
the  stupid.  Temperance  legislation  is  strongest  in  its  social 
aspect.  The  opponent  of  it  usually  champions  the  individ- 
ualist view;  its  partisans  uphold,  in  varying  degrees,  the 
social  view. 

Similar  questions  arise  regarding  lotteries,  gambling,  bet- 
ting, horse-racing,  etc.  When  a  man  backs  a  worthless  horse 
against  the  field,  money  probably  is  transferred  from  the 
stupider  to  the  shrewder  party.  The  philosopher  may  say 
that  the  sooner  a  fool  and  his  money  are  parted  the  better; 
but  the  broken  gambler  remains  a  burden  and  a  threat  to 
honest  society.  Gambling,  lotteries,  and  speculation  cause 
embezzlement,  crime,  unhappy  homes,  and  wrecked  lives. 
Here  are  to  be  found  with  difficulty  the  true  boundaries 
between  ethics  and  expediency.  A  busybody  despotism  may 
protect  the  fool,  but  it  thereby  helps  to  perpetuate  and 
multiply  his  folly;  yet  if  the  fool  is  left  alone,  he  too  often 
is  a  plague  to  the  wise  and  the  virtuous. 

5.  Usury  laws  are  found  almost  universally  in  civilized 
lands.  By  usury  was  formerly  meant  any  payment  for  the 
loan  of  goods  or  money;  now  it  means  only  excessive  pay- 
ments. In  former  times  moralists  and  lawmakers  were 
opposed  to  all  usury  or  interest.  Most  loans  were  made  in 
times  of  distress.  The  sources  of  loanable  capital  and  the 
chances  of  profitable  investment  were  fewer  in  the  past  than 
to-day.  For  the  last  four  centuries  there  has  been  on  the 
question  of  usury  a  gradual  change  of  opinion,  beginning 
in  the  commercial  centers  and  most  rapid  in  the  countries 
with  more  developed  industry.  A  moderate  rate  of  interest 
is  now  everywhere  permitted ;  but  in  all  but  a  few  communi- 


&ni  LABOR  LEGISLATION  509 

ties  the  rate  that  can  be  collected  is  limited  by  law,  and 
penalties  more  or  less  severe  are  imposed  on  the  usurious 
lender.  It  has  been  noted  in  another  connection  that  usury 
laws  are  practically  evaded  in  a  number  of  ways  within  the 
letter  of  the  law.  Many  writers  maintain  that  usury  laws 
do  more  harm  than  good  even  to  the  borrower,  whom  they 
are  designed  to  protect.  In  a  developed  credit  economy, 
where  a  regular  money-market  exists,  they  are  superfluous, 
to  say  the  least,  as  most  loans  are  made  below  the  legal 
rate.  Such  laws,  however,  have  a  partial  justification.  In 
a  small  money-market  they  to  some  extent  protect  the  weak 
borrower  at  the  moment  of  distress  from  the  rapacity  of  the 
would-be  usurer.  Their  utility  is  disappearing,  but  in  sim- 
pler industrial  conditions  usury  laws  are  fruits  of  the  social 
conscience,  a  recognition  of  the  duty  to  protect  the  weaker 
citizen  in  the  period  of  his  direst  need. 

§  II.      LABOR  LEGISLATION 

1.  Factory  laws  now  limit  in  many  ways  the  employ-  Growth  of 
ment  of  women  and  children,  and  the  hours  of  work.  Factory 
legislation  began  in  England,  early  in  the  nineteenth  century, 
to  check  some  of  the  worst  evils  then  showing  themselves 
in  the  factories.  It  has  since  increased  in  England  and  has 
been  copied  rapidly  by  other  countries.  Some  of  the  agri- 
cultural states  of  the  Union  have  as  yet  no  factory  laws,  but 
the  states  industrially  more  advanced  have  many.  They 
are  made,  first,  to  apply  to  children.  The  evil  of  forcing 
children  into  factories  is  easily  recognized.  The  child,  sub- 
ject to  the  commands  of  his  parents  or  guardians,  is  not  a 
free  agent.  At  times  a  lazy  father  is  tempted  to  support 
himself  in  idleness  on  the  wages  of  his  young  children. 
Often  poverty  leads  the  parents  to  rob  their  children  of 
health,  of  schooling,  and  of  the  joys  of  childhood.  Child- 
labor  depresses  the  wages  of  adults  and  the  evil  grows. 
Children  laboring  long  hours  in  close  and  grimy  factories, 


510  OTHER   PROTECTIVE  LEGISLATION  [CH.  52  > 

and  growing  into  blighted  and  ignorant  manhood,  are  a 
threat  to  society.  In  agricultural  conditions,  such  as  have 
prevailed  generally  in  America,  there  is  far  less  need  of 
limiting  the  hours  of  work  and  the  age  at  which  children 
may  begin  to  work.  The  barefoot  boy  trudging  over  clover- 
fields  to  carry  water  to  the  harvesters  may  be  the  happier, 
healthier,  and  better  for  his  work. 

The  work  of  women  in  factories  tends  to  depress  the  wages 
shorter*1  of  men,  is  inevitably  harmful  to  family  life,  and,  when  the 
hours  work  is  arduous  and  continuous,  the  evils  are  visited  upon 

succeeding  generations.  In  the  early  days  of  the  factory 
system  in  England,  the  hours  of  work  were  lengthened  in 
order  to  make  the  machinery  earn  as  much  as  possible.  The 
first  laws  regulating  hours  applied  especially  to  women  and 
children,  limiting  their  work  to  ten  or  twelve  hours  daily. 
Later,  this  regulation  was  made  to  apply  to  men,  and  now  is 
found  in  most  civilized  lands.  In  recent  years  the  agitation 
has  been  for  an  eight-hour  day,  and  doubtless  it  will  some 
day  be  adopted  in  the  majority  of  trades. 

The  2.     Many  laws  provide  for  the  health  and  safety  of  work- 

remeSeTfor  ers  ^n  factories  and  mines.  Both  workman  and  employer 
injuries  are  in  many  ways  interested  in  providing  against  danger 
from  fire,  bad  ventilation  and  lighting,  bad  sanitation,  un- 
protected and  dangerous  machinery,  and  bad  moral  con- 
ditions in  the  factories  and  other  places  of  work.  What 
can  the  workman  do  to  protect  himself?  (1)  He  may  re- 
fuse to  work  whenever  the  conditions  are  bad.  But  this 
requires  that  he  inspect  the  factory  and  judge  of  the  san- 
itary conditions  in  each  case,  and  that  he  then  resist  the 
temptation  to  accept  employment  of  which  he  may  be  sorely 
in  need.  (2)  He  may  ask  higher  wages  to  compensate  for  the 
added  risk.  But  this  is  not  practically  possible  with  his 
insufficient  knowledge  of  conditions,  and  it  supposes  an 
equal  caution  in  many  other  workers.  It  is  well  that  indi- 
vidual men  are  not  excessively  cautious,  or  the  state  would 
lack  brave  citizens  and  defenders.  It  is  better  that  the  fore- 


§*IJ  LABOR  LEGISLATION  511 

thought  be  in  part  exercised  by  the  community  collectively. 
(3)  The  person  injured  in  health  or  limb  may  sue  for  dam- 
ages. But  this,  with  his  means  and  knowledge,  is  often  im- 
possible, and  is  a  costly  process,  yielding  a  pitiful  recompense 
for  a  blighted  life. 

The  employer  is  interested  in  attracting  better  workmen  Factory 
at  lower  wages,  and  in  avoiding  damages  by  making  the  J^sc*° 
conditions  of  work  favorable.     The  law  seeks  the  same  end  accidents 
by  more  economical  ways  when  it  sets  a  minimum  standard. 
Experience  shows  that  certain  safety  appliances  should  al- 
ways be  present  to  prevent  the  evils ;  for  a  state  to  leave  their 
provision  to  self-interest,  is  to  trifle  with  the  welfare  of  its 
citizens.      Factory   legislation   usually   is   opposed   by   em- 
ployers because  of  the  expense  it  causes;  but  if  the  regula- 
tions apply  to  all  factories,  the  expense  becomes  a  part  of 
the  cost  of  production  and  is  shifted,  like  the  other  expenses 
of  production,  to  the  general  body  of  consumers,  of  which 
the  employers  form  only  a  small  part. 

3.  Laws  regulate  the  form,  time,  and  methods  of  payment  Legal 
in  manufactures  and  mining.  Companies  sometimes  keep  1^%ti™ 
stores  and  pay  the  workers  in  mines  and  factories  in  goods,  payment 
instead  of  money.  Such  a  store  in  the  hands  of  a  philan- 
thropic employer  might  easily  be  made,  without  expense  to 
himself,  a  great  boon  to  his  workmen,  giving  them  more  than 
the  benefits  of  consumers'  cooperation.  But  the  usual  result 
is  told  by  the  fact  that  such  stores  are  known  as  "truck 
stores,"  "pluck-me  stores."  They  are  most  often  found 
where  some  one  large  corporation  dominates  in  the  commu- 
nity, as  in  mines,  where  the  workers  are  in  a  very  dependent 
condition.  If  the  higher  prices  demanded  practically  lower 
real  wages,  it  would  seem  that  the  worker  had  an  immediate 
remedy  in  his  power  to  demand  higher  money-wages.  Rec- 
ognizing that  this  is  for  the  most  part  an  illusion— for  it  is 
just  in  such  places  that  the  conditions  for  free  competition 
are  least  present— the  law  in  many  states  prohibits  these 
stores.  It  regulates  also  the  measuring  of  work,  fixing  the 


512 


OTHER  PROTECTIVE  LEGISLATION 


[CH.  52 


Limitation 
of  freedom 
of  contract 


General 
nature  of 
this  social 
legislation 


size  of  screens  and  of  cars  used  in  coal-mining.  The  law 
is  especially  favorable  to  the  hand-laborer  in  regard  to  the 
collection  of  his  wages,  requiring  regular  monthly  or  fort- 
nightly or  sometimes  weekly  payments.  Mechanics'  liens 
give  to  workmen  in  the  building  trades  the  first  claim  on  the 
products  of  their  labor. 

4.  In  some  cases  the  law  forbids  "contracting  out,"  and 
the  courts  fix  the  terms  of  the  contract.    In  general,  the  law 
does  not  interfere  with  the  right  of  the  citizen  to  make  any 
formal  contract  he  chooses.     It  confines  itself  to  providing 
rules  and  agencies  for  interpreting  and  enforcing  the  con- 
tracts when  made.    Employers  often  compel  workmen  to  sign 
a  release  from  damages  in  case  of  accident.     This  practice 
was  forbidden  even  by  common  law,  and  many  recent  statutes 
have  specifically  provided  that  employers  cannot  "contract 
out"  of  the  right  to  claim  damages.    The  courts  are  particu- 
larly watchful  of  the  interests  of  children,  who  are  usually 
deemed  incapable  of  entering  into  contracts  binding  them  to 
their  injury.    Sailors,  likewise,  have  long  been  protected  and 
guarded  by  the  law,  because,  journeying  far  from  home,  they 
are  peculiarly  in  the  power  of  their  employers.     The  Eng- 
lish  courts   may  even   change   the   contract   if   the   sailors 
have  been  coerced  by  their  masters.     The  rights  of  married 
women  to  mortgage  their  property  is  limited  in  some  states 
in  recognition  of  the  undue  influence  that  may  be  exercised 
by  their  husbands.     The  attempts  in  the  last  twenty  years 
to  settle  the  Irish  land-question  have  resulted  in  a  steady 
increase  of  the  interference  of  law  and  courts  with  the  free- 
dom of  contract  between  tenant  and  landlord.     Though  in 
many  ways  freedom  of  contract  is  thus  limited,  competition 
is  not  entirely  destroyed;  it  is  turned  in  other  and  usually 
better  directions. 

5.  This  group  of  social  laws  resembles  protective  tariffs 
in  preventing  free  competition,  but  differs  from  them  in 
varying  ways  and  degrees.  Writers  class  all  such  laws  as  pro- 
tective legislation,  in  that  they  depart  from  the  rule  of  free 


$11}  LABOE  LEGISLATION  513 

trade  taken  in  its  broadest  sense.  It  does  not  follow,  how- 
ever, that  all  these  laws  stand  or  fall  together,— that  if  the 
protective  tariff  is  wrong,  all  are  wrong.  The  justification  of 
every  such  measure  is  limited  and  relative,  and  therefore  of 
varying  strength.  All  protective  measures  are  alike  in  that  Economic 
the  free  choice  of  the  citizen  is  forbidden  by  law.  The  ar-  H™£1 
gument  for  the  tariff  is  economic  and  political.  The  tariff  primary 
does  not  seek  to  prevent  a  moral  evil ;  foreign  trade  is  morally 
as  good  as  other  trade.  In  a  large  majority  of  social  laws  the 
moral  purpose  is  fundamental.  It  is  the  demand  of  human- 
ity that  competition  be  placed  on  a  higher  plane.  Tariff 
legislation  is  primarily  in  the  interest  of  a  special  well-to-do 
class,  with  which  other  citizens  are  compelled  unwillingly  to 
trade.  Most  social  legislation  is  to  protect  the  weak  from 
being  forced  into  contracts  injurious  to  their  welfare  and 
happiness.  In  any  case,  social  legislation  is  not  to  be  justi- 
fied by  any  but  the  most  general  abstract  principle,— the  at- 
tainment of  the  best  social  result.  The  best  test  of  social 
protective  laws  is  their  contribution  to  a  higher  independence 
and  to  a  freer  competition  on  a  higher,  more  worthy,  and 
more  humane  plane. 


CHAPTER  53 
PUBLIC    OWNERSHIP    OF   INDUSTRY 

§  I.       EXAMPLES   OF   PUBLIC   OWNERSHIP 

The  kinds  of  !•  Local  political  units  generally  acquire  only  industries 
political  whose  products  must  be  used  in  the  place  where  produced. 
The  word  industry  is  used  here  in  a  broad  sense,  including 
agents  of  psychic  income  not  usually  so  classed,  such  as  pub- 
lic parks.  The  grouping  of  publicly  owned  industries  accord- 
ing to  the  size  and  importance  of  the  political  units  cannot  be 
exact,  because  some  classes  of  industries  are  owned  by  several 
kinds  of  political  units.  Yet,  especially  with  application  to 
American  conditions,  an  approximate  classification  may  be 
made  on  this  principle.  Federal  states  consist  of  three  main 
groups  of  political  units:  national,  provincial,  and  local. 
Provincial  units  are  the  largest  subdivisions,  as  the  American 
" states,"  or  commonwealths,  the  German  states,  and  the 
provinces  in  other  countries.  The  term  local  political  unit 
is  more  complex  and  may  mean  county,  township,  village, 
city,  and  school  or  sanitary  district;  but  most  of  what  is  to 
be  said  of  local  ownership  refers  to  cities  or  to  incorporated 
villages. 

Municipal         Nearly  all  public  parks  and  recreation  grounds  are  owned 

ownership     ^y  cities.     As  population  has  become  more  dense,  private 

libraries,'       yards  of  any  extent  become  impossible,  in  cities,  for  all  but 

&c-  the  wealthy.     Public  ownership  of  parks  insures  recreation 

grounds  to  the  common  man  in  the  most  economical  way. 

Of  late  the  movement  for  large  and  small  public  parks  and 

playgrounds  has  gone  on  rapidly  in  American  cities. 

514 


§  I]  EXAMPLES  OF   PUBLIC  OWNERSHIP  515 

lated  to  parks  are  public  baths,  public  libraries,  art  collec- 
tions, museums,  zoological  gardens,  etc.  Some  have  declared 
that  such  a  policy  stops  little  short  of  a  paralyzing  social- 
ism for  the  masses.  Reason  and  experience  fail  to  reveal 
any  such  danger  so  long  as  the  things  supplied  gratify  the 
higher  tastes — as  art,  music,  literature,  innocent  social  recre- 
ation. Not  until  the  necessities  of  life,  as  bread,  clothing, 
and  houses,  are  supplied,  is  encouragement  given  to  the 
increase  of  improvident  families  and  to  the  breaking  down 
of  independent  character.  The  means  of  local  communica- 
tion—streets, roads,  bridges— were  once  owned  largely  by  of  bridges, 
private  citizens.  Here  and  there  still  are  found  toll  roads  markets, 
and  toll  bridges  built  under  charters  granted  a  century  ago,  W0rks,  &c. 
but  tolls  on  public  thoroughfares  are  for  the  most  part  abol- 
ished. A  public  market,  where  the  producer  from  the  farm 
and  the  city  consumer  can  meet,  is  an  old  institution  that  is 
now  being  established  anew  in  many  cities.  The  providing  of 
apparatus  for  extinguishing  fires  is  always  a  public  duty; 
the  conveyance  of  waste  water  is  increasingly  a  public  func- 
tion; and  the  supply  of  pure  water,  while  often  a  private 
enterprise  in  villages,  and  sometimes  in  large  cities,  is  in- 
creasingly undertaken  by  public  agencies.  Public  ownership 
of  gas  and  electric  lighting  is  less  common,  as  the  utility 
supplied  is  not  so  essential  and  the  industry  is  somewhat  less 
subject  to  monopoly ;  but  the  difference  is  one  of  degree  only. 
Street-railroads  are  often  under  public  ownership  in  Eu- 
rope ;  but  there  has  thus  far  been  no  case  of  the  kind  in  the 
United  States,  and  only  one  in  Canada. 

2.     The   American   state    owns   and   conducts   industries  American 
mainly  whose  products  have  a  wider  territorial  use.     The  Jjjjjj*81" 
American  commonwealth  has  retired  from  some  fields  where  industry 
once  it  was  engaged  in  industry.    Students  of  American  his- 
tory know  that  between  the  years  1830  and  1840  some  states 
engaged  largely,  even  wildly,  in  the  building  of  canals  and 
undertook  to  construct  railroads,  to  start  banks,  and  to  en- 
gage in  other  enterprises.     The  undertaking  of  these  indus- 


516 


PUBLIC  OWNERSHIP  OF  INDUSTRY 


[<JH.  53 


State 
ownership 
of  various 
kinds 


National 
ownership 
of  various 
kinds 


tries  was  determined  often  by  political  and  by  selfish  local 
interests,  and  their  operation  often  was  wasteful.  A  few  en- 
terprises succeeded,  the  most  notable  of  these  being  the  Erie 
Canal  in  New  York.  The  unsuccessful  ones  remained  worth- 
less property  in  the  hands  of  the  state  or  were  sold  to  pri- 
vate companies,  as  in  the  case  of  the  Pennsylvania  railroad. 
This  reckless  state  enterprise  was  a  bitter  lesson  in  public 
ownership,  and  even  after  seventy-five  years  is  not  without 
effect  on  public  opinion.  For  a  long  time  no  proposal  for 
public  ownership  could  have  a  fair  hearing  in  America.  But 
railroads  and  canals  are  publicly  owned,  and  more  or  less 
successfully  operated,  in  many  foreign  countries,  as  in  Prus- 
sia and  other  German  states,  in  Switzerland,  and  in  the  new 
states  of  Australia. 

There  has  been  recently  a  rise  of  interest  in  forestry  in 
America.  This  is  especially  likely  to  be  a  state  enterprise 
wherever  the  forest  tracts  are  entirely  within  the  limits  of 
the  state,  as  is  the  case  of  the  Adirondacks  in  New  York. 
Most  of  the  forests  in  Germany  are  either  communal  or  state- 
owned.  The  schools,  a  great  industry  for  turning  out  a  prod- 
uct of  public  utility,  are  largely  conducted  by  the  American 
state  and  by  local  units  rather  than  by  the  nation  or  by  pri- 
vate enterprise.  The  state  encourages  researches  in  the  arts 
and  sciences,  and  gives  technical  training.  A  variety  of  mi- 
nor enterprises  have  been  undertaken  by  states  to  supply 
salt,  phosphate,  banking  facilities,  even  some  manufactures. 
In  the  prisons  and  public  institutions,  states,  such  as  New 
York,  that  have  adopted  the  system  of  labor  on  public  ac- 
count engage  in  agriculture  and  manufacturing  on  a  large 
scale,  the  products,  amounting  to  millions  of  dollars  annu- 
ally, being  used  almost  entirely  by  public  agencies. 

3.  The  nation  owns  and  controls  many  industries  of  the 
widest  use  and  most  general  interest.  Some  industries  grow 
out  of  the  political  needs  of  government.  Established  as  a 
means  of  communication  with  military  outposts,  the  post  be- 
came a  convenient  means  of  communication  for  merchants 


§11]  ECONOMIC  ASPECTS  OF  PUBLIC  OWNERSHIP        517 

and  other  citizens  and  grew  into  a  great  economic  institution. 
In  most  countries  the  telegraph  is  publicly  owned  and  has 
been  annexed  to  the  post,  to  which  it  is  very  closely  related  in 
purpose.  The  national  improvements  connected  with  rivers 
and  harbors  were  first  political— that  is,  they  were  for  the 
use  of  the  governmental  navy ;  they  became,  secondly,  com- 
mercial—for the  free  use  of  all  citizens  engaged  in  trade; 
and  they  continue  to  unite  these  two  characters.  Forestry 
is  most  largely  undertaken  in  this  country  by  the  national 
government,  doubtless  because  the  large  forest  areas  in  the 
West  extend  over  state  boundaries,  and  because  large  tracts 
of  public  lands  were  still  unsold  at  the  time  public  attention 
was  attracted  to  the  subject.  Since  1$90,  the  policy  of  re- 
serving great  areas  for  forests,  and  picturesque  districts  for 
national  parks,  has  developed  greatly.  In  some  countries 
mines  are  thought  to  be  peculiarly  fitted  for  national  own- 
ership and  control.  In  Germany,  the  state  owns  some  coal, 
salt,  and  other  mines.  Coinage  and  banking  are  everywhere 
looked  upon  as  a  function  of  sovereignty,  and  yet  it  is  no 
more  necessary  for  a  nation  to  own  its  own  mint  in  order 
to  control  the  monetary  system  than  for  it  to  print  the  bank- 
notes in  order  to  regulate  their  issue.  The  American  gov- 
ernment has  its  own  printing  office  and  therewith  its  share 
of  troubles  with  organized  labor.  The  fish  commission,  and 
the  various  branches  of  the  department,  cooperate  with  pri- 
vate industry  in  many  ways.  In  Germany,  compulsory  in- 
surance is  provided  for  the  working-man.  This  hasty  sur- 
vey suggests  that  the  industries  undertaken  by  government 
are  both  varied  in  nature  and  large  in  extent,  although  small 
in  proportion  to  the  mass  of  private  industry. 

§  II.      ECONOMIC  ASPECTS  OF  PUBLIC   OWNERSHIP 

1.     Public  ownership  is  primarily  to  control  the  essential  The  primary 
agencies  of  government.     A  large  part  of  public  ownership   n^gf 
and  activity  in  industry  develops  from  political  functions,   ownership 


518 


PUBLIC  OWNERSHIP  OF  INDUSTRY 


[OH.  53 


Conflict  of 
public  and 
private 
interests 


As  society  evolves,  what  was  unessential  to  political  life  be- 
comes essential.  Civilized  government  requires  the  use  of  a 
number  of  material  agents.  Buildings  for  legislative  and 
executive  officers,  custom-houses,  post-offices,  lighthouses,  can 
be  rented  of  private  citizens,  as  post-offices  usually  are  in 
small  places;  but  it  is  obviously  economical  and  convenient 
in  large  cities  for  the  government  to  own  the  public  buildings. 
Government  can  reduce  to  a  minimum  its  employment  of  la- 
bor by  "farming  out"  the  taxes,  as  all  countries  once  did  to 
some  extent,  and  as  France  continued  to  do  up  to  the  French 
Revolution.  It  is  now  the  settled  policy  for  government  to 
own  or  control  its  essential  agencies,  but  this  does  not 
involve  in  every  case  the  employment  of  day-labor  direct 
to  clean  the  streets,  to  collect  garbage,  etc.  The  more  sim- 
ple political  functions  shade  off  into  the  economic.  To 
coinage  usually  are  added  the  issue  of  legal-tender  notes  and 
certain  banking  functions;  the  post  carries  packages,  trans- 
mits money,  and  in  some  cases  performs  the  function  of  a 
savings-bank  for  small  amounts.  The  only  open  question  is 
as  to  the  proper  limit  to  this  development. 

2.  Public  industry  expands  to  supply  as  free  goods  many 
essentials  of  good  citizenship,  and  to  insure  cheaper  and 
more  bountiful  supplies  of  others.  It  is  the  ideal  of  Herbert 
Spencer  and  of  a  small  surviving  group  of  laissez  faire  phi- 
losophers that  government  should  confine  itself  exclusively 
to  the  most  essential  political  functions,  leaving  the  economic 
functions  absolutely  alone.  It  should  keep  the  peace,  prevent 
men  from  beating  and  robbing  each  other,  and  preserve  the 
personal  liberty  of  the  citizen.  They  assume  that  all  of  the 
economic  needs  will  be  provided  by  competition,  in  the  best 
way  humanly  possible,  in  quantities  and  at  the  rate  needed. 
In  many  cases,  however,  the  general  interest  fails  to  harmo- 
nize with  that  of  the  individual.  The  forest  has  an  imme- 
diate utility  to  the  consumers  of  lumber,  and  it  has  also  a 
diffused  utility  in  its  influence  on  industry,  on  climate,  and 
on  torrents  and  floods.  Yet,  as  the  private  owner  cannot 


$I1J  ECONOMIC  ASPECTS  OF  PUBLIC  OWNERSHIP          519 

control  enough  of  the  forest  to  affect  the  climate,  and  could 
not  sell  climate  even  if  he  could  affect  it,  he  will  cut  down 
the  tree  whenever  he  can  gain  by  doing  so.  In  this  situation 
either  government  control  or  government  ownership  of  for- 
ests is  essential. 

In  some  cases  the  difficulty  of  private  ownership  is  in  the  social 
excessive  cost  of  collecting  for  the  service.    The  cost  of  main-  eoonomy  of 

D   .  .  some  public 

taming  tollhouses  at  short  intervals  on  a  turnpike  sometimes  industry 
exceeds  the  amount  collected.  Collection  in  other  cases,  as 
for  the  service  of  lighthouses  to  passing  ships,  is  impossible. 
Public  industry  secures,  through  the  economy  of  large  pro- 
duction, a  cheaper  and  more  efficient  service,  the  benefits  and 
costs  being  diffused  throughout  the  community.  The  benefits 
of  the  work  of  experiment-stations  for  agriculture  are  felt  im- 
mediately by  the  farmers,  but  are  diffused  to  all  citizens.  A 
manufacturer  able  to  keep  his  methods  secret,  or  to  retain  his 
advantages  for  a  time,  can  afford  to  undertake  experiments 
in  his  factory,  but  the  farmer  seldom  can.  The  public  owner- 
ship of  parks  for  the  use  of  all  gives  a  maximum  of  economy 
in  the  production  of  the  most  essential  utilities— fresh  air, 
sunshine,  natural  beauty,  and  playgrounds  in  the  midst  of 
crowded  populations.  Municipal  ownership  of  waterworks 
is  an  extension  of  the  same  idea.  Not  only  because  large 
amounts  of  water  are  used  by  the  public,  but  because  cheap, 
pure,  abundant  water  is  an  essential  condition  to  good  citizen- 
ship, speculation  should  in  every  possible  way  be  eliminated 
from  this  industry. 

3.     Public  ownership  tends  constantly  to  include  the  in-  Monopolistic 
dustries  of  a  monopolistic  nature,  locally  supplying  general  ™*^e°f 
necessities.     This  is  no  abstract  principle;  it  is  merely  a  industries 
statement  of  what  is  seen  to  be  happening.    Some  industries 
are  of  such  a  nature  that  they  drift  inevitably  into  monopo- 
listic  control.     Waterworks,    gas,   electric   lighting,    street- 
railways,  telephone  systems,  are  among  these.    However  fierce 
may  be  the  competition  for  a  time,  sooner  or  later  either  one 
company  drives  out  the  other  or  buys  it  up,  or  both  come 


520 


PUBLIC   OWNERSHIP  OF  INDUSTRY 


Localized 
production 
favors 
monopoly 


Gains  from 
large  pro- 
duction 
favor  mon- 
opoly 


Uniformity 
of  products 
favors  mon- 
opoly 


[CH.  53 


to  an  agreement  by  which  the  public  is  made  to  pay  higher 
prices. 

A  feature  favoring  the  growth  of  monopoly  when  such 
industries  are  left  to  private  enterprise,  is  the  need  to  produce 
and  supply  the  utility  at  a  given  locality.  While  two  street- 
railways  can  compete  on  neighboring  streets,  it  is  physically 
impossible  for  two  or  more  to  compete  on  the  same  street. 
Two  systems  of  water-mains  or  gas-mains  can  be  put  down, 
as  sometimes  is  done,  but  this  is  not  only  a  great  economic 
waste,  but  the  tearing  up  of  the  streets  is  an  intolerable  pub- 
lic nuisance.  This  difficulty  is  less  marked  in  the  case  of 
telephones  and  electric  lighting,  and  some  persons  still  cling 
to  faith  in  competition  to  regulate  the  rates  in  those  indus- 
tries ;  but  faith  in  competition  between  water-companies  and 
between  gas-companies  has  been  given  up  by  nearly  all  stu- 
dents of  the  subject. 

4.  A  second  feature  favoring  monopoly  in  such  industries 
is  the  marked  advantage  of  large  production  in  them.    These 
industries  are  usually  spoken  of  as  "industries  of  increasing 
returns. ' '    This  advantage  is  enjoyed  in  some  degree  by  every 
enterprise,  but  it  is  gradually  neutralized  and  limited  (as  has 
been  noted  elsewhere).     The  need  to  extend  an  expensive 
physical  plant  to  every  point  where  customers  are  to  be 
served,  and  the  very  much  smaller  cost  per  unit  of  delivering 
large  amounts  of  water,  gas,  electricity,  transportation,  etc., 
on  the  same  street,  offered  a  greater  inducement  for  one  com- 
petitor to  crowd  out  or  buy  out  the  other  at  a  more  than 
liberal  price.     Even  then,  larger  net  dividends  and  corre- 
spondingly larger  capitalization  are  secured  than  were  before 
possible  to  both  companies  combined. 

5.  A  third  feature  favoring  monopoly  is  uniformity  in 
the  quality  of  the  product  furnished.    It  is  a  general  truth 
that  competition  is  most  persistent  where  there  is  the  greatest 
range  of  choice  open  to  the  customer,  and  consequently  the 
most  individual  treatment  required  in  the  enterpriser.     An 
artist,  even  a  storekeeper,  attracts  about  him  a  body  of  pa- 


§nj          ECONOMIC  ASPECTS  OF  PUBLIC  OWNERSHIP          521 

trons  who  like  his  product  (for  the  merchant's  manner  and 
method  of  dealing  are  a  part  of  the  quality  of  his  goods), 
and  who  cannot  be  tempted  away  by  slight  differences  in 
price.  Rival  companies  in  the  stage  of  competition  are  seen 
to  claim  superiority  for  their  particular  goods  and  to  improve 
their  service  in  every  way  possible.  A  new  telephone  com- 
pany, entering  where  a  monopoly  has  held  the  field,  works 
at  once  a  wonderful  betterment  in  rates,  courtesy,  and  service. 
But  as  the  product  of  all  competitors  attains  the  highest 
technical  standard  possible  at  the  time,  the  rivalry  is  reduced 
to  one  of  price,  and  it  is  usually  a  ''fight  to  the  finish." 

6.  A  fourth  feature  favoring  monopoly  in  these  enter-  Franchises 
prises  is  the  necessity  of  making  permanent  and  exceptional  J 

use  of  the  public  streets  and  alleys.  If  this  right  were 
granted  by  a  general  law  to  every  citizen,  this  feature  would 
be  sufficiently  implied  in  the  foregoing  discussion.  As  it 
would  be  intolerable  to  allow  private  interests  to  use  public 
property  in  whatever  way  they  wished,  the  legislative  body 
makes  special  grants  in  such  cases  in  view  of  the  circum- 
stances. Not  only  is  the  legislature  (or  council,  or  county 
board  of  commissioners,  etc.)  induced  by  the  economic  diffi- 
culties to  withhold  a  charter  to  a  second  company,  but  it  is  ex- 
posed to  the  greatest  corrupting  influences  by  the  one  already 
established.  The  knowledge  of  the  opposition  to  be  encoun- 
tered in  getting  a  franchise  must  keep  competitors  out,  even 
though  monopoly  prices  are  maintained. 

In  view  of  these  several  features,  which  are  so  closely  re- 
lated that  they  form  a  common  character,  more  or  less  fully 
shared  by  various  industries,  and  especially  in  view  of  the 
necessity  for  the  formal  granting  to  them  of  peculiar  priv- 
ileges in  the  form  of  a  public  franchise,  the  public,  in  order 
to  protect  the  general  interest,  is  forced  to  undertake  an 
exceptional  control  of  these  industries. 

7.  Several  courses  are  open  to  the  public,  acting  in  its  Modes  of 
political  capacity,  to  retain  these  monopoly  advantages  for  °°°^llmg 
the  general  welfare.     First,   it  may  do  nothing,   trusting  utilities 


522  PUBLIC  OWNERSHIP  OF  INDUSTRY  [CH.  53 

vainly  to  competition  to  regulate  the  rate,  or  consciously 
leaving  the  result  to  be  worked  out  by  the  monopoly  princi- 
ple ;  this  is  what  in  most  cases  has  been  done  in  the  past  in 
America.  Second,  in  granting  the  franchise  it  may  attempt 
to  fix  near  cost  the  charge  for  the  service  or  product,  so  that 
the  franchise  will  be  worth  little  or  nothing.  Third,  it  may 
leave  the  rate  to  be  fixed  by  the  monopoly  principle,  but 
charge  for  the  franchise  so  much  that  the  value  of  the  mo- 
nopoly is  appropriated  into  the  public  treasury.  Fourth,  it 
may  have  public  officials  carry  on  the  business,  either  selling 
the  product  at  cost  or  making  monopoly  profits  that  go  into 
the  public  treasury.  Various  combinations  of  these  plans 
are  followed  in  practice,  the  most  common  plan  being  the 
fixing  of  maximum  rates  which,  with  improved  methods,  gen- 
erally become  ineffective.  It  is  difficult  to  fix  a  uniform 
rate  that  is  equitable,  because  conditions  change,  and,  fur- 
ther, because  a  uniform  rate  must  be  applied  to  all  parts  of 
the  town,  although  the  cost  of  service  varies  greatly.  It  is 
difficult  to  sell  the  franchise  for  near  what  it  is  worth,  be- 
cause of  the  uncertainty,  of  the  political  blackmail,  and  of 
the  limited  number  of  competent  bidders.  There  remains 
only  the  policy  of  public  ownership  to  secure  the  profits  of 
monopoly  to  the  public,  either  directly  or  in  a  diffused 
manner. 

Economic  8.  Public  ownership  is  economically  justified  when  it  se- 
buwic°f  cures  a  utility  of  widespread  consumption,  otherwise  impos- 
ownership  sible,  or  insures  the  public  a  better  quality  or  a  lower  price. 
The  question  of  public  ownership  is  not  exclusively  an 
economic  question.  There  are  incidental  problems,  such  as  its 
effects  on  enterprise  and  on  political  integrity,  with  which 
it  is  not  possible  here  to  deal.  In  the  main,  however,  public 
ownership  is  simply  a  business  proposition  which  must  be 
justified  by  its  economic  results.  In  the  case  of  a  general 
social  benefit  not  to  be  secured  without  public  ownership,  as 
popular  education  or  the  climatic  effect  of  forests,  the  only 
question  to  answer  is  whether  the  utility  is  worth  the  cost.  In 


§11]  ECONOMIC  ASPECTS  OF  PUBLIC  OWNERSHIP          523 

the  case  of  industries  already  in  private  hands,  as  water- 
works, gas  and  electric  lighting,  there  is  needed,  to  make  a 
wise  decision  possible,  a  knowledge  of  the  effect  a  change  to 
public  ownership  will  have  on  value.  If  public  officials  can  cost  under 
furnish  some  goods  cheaper  than  they  are  furnished  by  pri-  PuWicor 
vate  enterprise,  it  is  because  of  the  wide  margin  of  monopoly  ownership 
profit,  not  because  there  is  any  magic  in  public  ownership. 
The  same  general  items  of  cost  must  be  met.  The  first  cost 
of  the  plant  and  the  annual  interest  payments  are  much  the 
same.  Experience  shows  that,  because  of  political  influence, 
wages  are  likely  to  be  higher  under  public  ownership,  but 
salaries  of  officials  are  higher  under  private  ownership.  On 
the  whole,  public  industry  in  these  respects  probably  has  no 
advantage.  Some  items  of  cost  may  be  less  under  public 
management.  Public  collection  of  dues  along  with  taxes  is 
an  advantage  not  enjoyed  by  private  companies.  Several 
public  officials  sometimes  share  the  same  office  and  thus  re- 
duce expenses.  In  small  towns  the  public  electric  lighting 
and  waterworks  have  been  operated  more  economically  under 
one  roof.  Public  industry  does  not  have  to  meet  the  cost  of 
lobbying  and  blackmail  which  are  often  forced  upon  private 
companies.  But  the  greatest  source  of  saving  in  public  own- 
ership is  the  value  of  monopoly  privileges  that,  under  private 
management,  go  into  private  pockets. 

The  temptation  to  political  corruption  may  be  more  insis-  character  of 
tent  when  a  large  force  of  men  is  constantly  employed,  and  JJJJ^ 
when  large  supplies  are  constantly  purchased,  by  public  offi- 
cials, but  the  temptation  is  not  so  strong  or  so  centralized  as 
it  is  in  the  granting  of  franchises  to  wealthy  corporations. 
Public  industry  is  weakened  by  the  absence  of  certain  motives 
to  excellence  that  are  present  in  private  business.  The  income 
of  public  officials  not  being  dependent  on  the  economy  of 
management,  the  spur  and  motives  of  competitive  industry 
are  lacking.  No  social  discovery  has  made  individual  honesty 
and  civic  virtue  useless  to  good  government. 

The  decision  in  any  specific  case  is  one  dependent  on  local 


524 


PUBLIC  OWNERSHIP  OP  INDUSTRY 


[CH.  53 


Limits  and 
effects  of 
public 
ownership 


conditions,  and  the  exact  limits  of  public  ownership  are  not 
fixed.  Industry  is  changing  so  rapidly  that  new  experience 
is  needed  each  year.  The  main  outlines  of  public  ownership, 
however,  are  now  in  large  part  determined.  Some  industries 
do  well,  others  ill,  under  public  management,  and  between 
these  lie  many  debatable  cases.  Waterworks  and  probably 
electric  lighting,  because  of  the  comparative  simplicity  of 
their  operation,  are  more  suitable  for  public  ownership  than 
are  gas-works.  No  absolute  line  divides  the  one  group  from 
the  other.  But  whatever  the  changes,  the  student  of  the  the- 
ory of  value  must  never  overlook  the  fact  that  the  increase  of 
public  ownership  is  altering  in  manifold  ways  the  prices  of 
goods,  and  is  reacting  also  on  the  production,  distribution, 
and  consumption  of  incomes. 


• 


CHAPTER  54 
RAILROADS  AND  INDUSTRY 

§  I.   TRANSPORTATION  AS  A  FORM  OF  PRODUCTION 

1.  Transportation  of  goods  and  men  is  one  of  the  most  Productivity 
important  modes  of  production.  When  utility  was  thought  ^tioT1™ 
of  as  inherent  in  things  rather  than  as  resulting  from  a  re- 
lation between  things  and  wants,  it  was  usual  to  consider 
only  those  industries  as  truly  productive  that  brought  some- 
thing physical  into  existence,  as  do  agriculture  and  the  ex- 
tractive industries.  Even  after  it  was  recognized  that  a 
change  of  form  also  imparted  value,  it  was  still  denied  that 
a  changing  of  place  could  be  truly  productive  industry.  But 
when  production  is  seen  to  be  the  bringing  of  things  into 
right  relations  with  wants,  transportation  may  be  deemed  to 
be  the  primary  and  typical  mode  of  increasing  income.  Move- 
ment is  necessary  to  the  existence  of  animals.  The  animal, 
in  the  order  of  evolution  a  higher  form  of  life  than  the  more 
fixed  plants,  goes  to  seek  food,  and  has  open  to  it  a  wider 
range  of  possibilities  in  life.  With  slight  exceptions,  it  is  true 
that  the  only  way  in  which  animals  can  bring  about  better 
place-relations  between  their  wants  and  goods  is  by  moving 
themselves.  To  this  power  man  has  added  that  of  moving 
goods  and  thus  adds  enormously  to  income.  Agents  being 
valued  in  accordance  with  their  net  productiveness,  the  near- 
ness to  market  and  the  ease  of  transporting  the  product  are 
large  factors  in  price.  The  location  of  a  field  enters  into 
its  value  as  truly  as  do  the  chemical  qualities  of  the  soil.  A 
rocky  field  near  a  market  may  be  richer,  in  an  industrial 

525 


526 


RAILROADS  AND  INDUSTRY 


[CH.  54 


Original 

local 

advantages 


Influence  of 
waterways 
on  local 
advantages 


sense,  than  the  richest  soil  far  remote,  which  can  be  used  by 
men  only  at  the  cost  of  their  alienation  from  society.  Means 
of  transportation  set  a  limit  to  social  and  political  groupings, 
to  the  size  of  the  market,  and  to  the  possibility  of  exchange. 
Indeed,  all  exchange  value  is  conditioned  upon  the  possibility 
of  transportation. 

2.  Natural  differences  in  the  grades  of  fertility  and  of 
accessibility  determine  first  the  most  valued  locations.    Prim- 
itive man,  dependent  on  the  bounties  of  nature,  had  to  take 
things  as  he  found  them.    Few  places  unite  the  best  grades 
of  the  essential  things :  water,  food,  fertile  soil,  a  favorable 
climate,  protection  against  enemies.   Between  tribe  and  tribe 
went  on  ceaseless  war  for  the  few  favored  spots  of  the  earth. 
Where  transportation  is  possible,  trade  can  supply  one  or 
more  of  the  missing  elements.     International  trade  began 
early,  wherever  it  could,  to  strengthen  economically  the  weak 
localities.    Advantages  in  transportation  are  sometimes  better 
than  fertile  soil  and  rich  resources.     The  early  centers  of 
civilization  were  on  the  banks  of  rivers  and  the  shores  of 
seas.    Around  the  Mediterranean  were  the  ancient  empires. 
Trading-towns  grew  up  at  ports  and  at  the  favored  points  of 
trade:  Tyre,  Sidon,  Carthage,  Florence,  Genoa,  Venice,  Ant- 
werp, London,  New  York.    The  early  settlements  in  America 
were  grouped  along  the  coast.    Without  the  cheap  communi- 
cation afforded  by  water,  the  colonies  would  have  been  cut  off 
from  the  benefits  of  continuing  contact  with  the  older  civil- 
ization.   It  would  have  been  a  great  price  to  pay,  even  for  a 
rich  continent. 

3.  The  opening  up  of  new  water-routes  of  travel  has  pro- 
foundly altered  the  prosperity  of  nations.     Sometimes  the 
relation  of  cause  and  effect  is  the  reverse  of  that  just  noted. 
The  conquest  of  Asia  Minor  by  the  Turks  closed  the  lines  of 
travel  with  the  East,  destroyed  the  trade  of  the  Italian  cities, 
and  stimulated  exploration  for  new  routes.    The  War  of  1812 
in  America  stopped  the  coast  trade  and  forced  on  the  wagon- 
roads  between  the  New  England  and  the  Southern  states  a 


§JIJ  THE   RAILROAD  AS  A  CARRIER  527 

great  traffic,  which  declined  quickly  at  the  close  of  the  war. 
Again,  the  growth  of  population  and  industry  shifts  the  cen- 
ter of  trade,  as  it  did  from  the  south  to  the  north  of  Europe, 
and  as  it  is  doing  from  England  to  America.  The  discovery 
of  new  routes,  however,  has  wrought  the  most  rapid  and 
sweeping  changes.  These  three  causes  united,  about  the  time 
of  the  discovery  of  America,  to  overthrow  the  prosperity  of 
the  older  cities  of  Europe,  while  the  opening  of  the  resources 
in  America,  the  abundance  of  silver  and  gold,  trade  with  the 
colonists  and  the  Indians,  showered  wealth  and  trade  into  the 
lap  of  Spain,  Holland,  Belgium,  England,  and  the  northern 
cities  of  Germany.  Such  changes  continue  under  our  eyes. 
The  Erie  Canal  has  an  influence  on  values  in  every  township 
from  New  York  to  Buffalo,  and  along  the  lake  shores  to  the 
head  of  Lake  Superior.  The  Suez  Canal  marked  an  epoch 
in  ocean  travel.  The  American  Isthmian  Canal  will  affect  the 
value  of  many  investments,  from  the  Gulf  of  Mexico  to  the 
Pacific  Coast.  A  marked  change  in  transportation  thus 
shifts  the  level  of  values  in  a  locality.  Fortunes  are  made 
and  lost.  One  community  rises  and  another  sinks.  Incre- 
ments and  decrements  of  value  on  a  great  scale  are  unearned, 
and  all  classes  of  goods  are  affected,  though  in  varying 
degrees. 

§  II.       THE   RAILROAD   AS    A    CARRIER 

1.     Different  modes  of  transport  are  more  or  less  econom-  Technical 
ical  relatively  to  the  other  industrial  conditions.     Not  only  vs'n    . 
new  routes  but  new  agents  of  travel  change  the  scale  of  val-  efficiency 
ues.     In  early  societies,  undeveloped  industrially,  first  men,   ^tJo^n8po 
then  domestic  animals,  were  used  as  beasts  of  burden.    The 
first  vehicles  are  technically  simple  in  design  and  construc- 
tion ;  on  land  are  used  drags,  sleds,  carts ;  on  waterways  are 
used  rafts,  canoes,  barges,  and  boats.     Primitive  means  of 
transportation  had  to  be  inexpensive,  for  poverty  and  the 
uncertainty  of  early  society  forbade  the  tying  up  of  large  re- 


528 


RAILROADS  AND  INDUSTRY 


[CH.  54 


Economic 
advantages 
of  natural 
waterways 


Merits  and 
defects  of 
canals 


sources  in  them.  Technical  efficiency  of  means  of  transpor- 
tation may  be  contrasted  with  economic  efficiency.  Technical 
goodness  is  absolute,  and  is  measured  in  speed  and  weight  of 
cargo;  economic  efficiency  is  relative,  and  varies  with  the 
money  cost  and  money  value  of  the  services.  A  turnpike  is 
more  efficient  than  a  mud  road,  yet  in  some  districts  it  is  bad 
economy  to  build  it.  A  railroad  is  more  efficient  than  a  cart, 
yet  in  some  places  even  pack-horses  are  more  economical.  To 
be  economical,  the  expenditure  needed  to  supply  the  efficient 
agent  must  be  warranted  by  the  volume  and  value  of  traffic. 

2.  The  most  economical  means  of  transportation  before 
the  railroad  were  the  waterways,  natural  and  artificial.  Some 
natural  waterways  still  afford  the  most  economical  means  of 
transportation  between  favorably  situated  ports.  Coal  is 
shipped  most  cheaply  in  sailing  vessels  from  Wales  around 
Cape  Horn  to  ports  along  the  western  coasts  of  Amer- 
ica. A  part  of  California's  regular  fuel-supply  is  obtained 
in  this  way.  Coal  has  been  shipped  from  Pennsylvania  to 
Europe,  and  in  the  anthracite  coal-strike  in  1902,  some  was 
shipped  from  England  to  America.  Invention  has  reduced 
the  cost  of  construction  and  operation  of  vessels  and  has  in- 
creased their  safety  and  speed,  thus  multiplying  the  efficiency 
of  the  natural  waterways.  The  large  cities  in  America  are 
situated  on  waterways,  usually  where  there  is  a  break  in 
transportation  requiring  reshipment,  as,  for  example,  at  New 
York,  San  Francisco,  Buffalo,  New  Orleans,  Cincinnati,  Chi- 
cago, Minneapolis,  and  St.  Paul.  Likewise  many  of  the  small 
cities  and  villages,  serving  as  local  trading  centers,  owe  their 
existence  to  similar  though  less  powerful  influences. 

Canals  are  begun  as  connecting  links  in  a  system  of  natural 
waterways  to  extend  the  advantages  of  cheap  transportation. 
The  Erie  Canal  not  only  serves  the  three  hundred  miles  of 
territory  along  its  banks,  but  it  opened  to  commerce  all  the 
lands  tributary  to  the  Great  Lakes.  The  great  advantage  of 
canals  is  cheapness  of  operation  due  to  the  simplicity  of  the 
machinery  needed  and  to  the  great  loads  that  can  be  moved 


§11]  THE  RAILROAD  AS  A  CARRIER  529 

with  small  power.  A  cent  a  ton-mile  is  a  paying  rate  on  a 
canal.  For  heavy,  slow-moving  freight,  the  railroads  can 
hardly  rival  the  canals  at  their  best.  As  canals,  however, 
can  be  built  only  along  a  level  country  and  where  the  water 
supply  is  at  a  high  level,  their  construction  is  limited  to  a 
small  portion  of  the  country.  The  law  of  extensive  dimin- 
ishing returns  applies  strongly  to  the  construction  of  canals. 
The  first  canals  are  easily  constructed  and  economically 
operated,  but  it  is  only  with  greater  cost  and  difficulty  that 
the  system  can  be  successively  extended.  In  temperate  cli- 
mates their  use  is  limited  by  ice  to  a  part  of  the  year,  and 
the  summer's  drought  sometimes  limits  it  still  further.  At 
its  best,  therefore,  the  small  land-locked  canal  is  fitted  only 
to  be  a  supplementary  agent  in  the  system  of  transportation 
wherever  industry  demands  high  speed  and  great  regularity. 
Far  different  is  the  case  of  the  oceanic  canal  in  a  tropical 
climate. 

3.  The  railroad  is  rapidly  surpassing  in  importance  every  superior 
other  agency  of  transportation.  Even  in  respect  to  cheapness, 
the  unique  virtue  of  waterways  in  favored  localities,  the  rail- 
road has  been  making  rapid  gains.  Improvements  in  road- 
bed, rails,  cars,  engines,  and  other  equipment  are  reducing 
greatly  the  cost  of  conducting  traffic  on  the  main  lines  of 
roads.  The  adaptability  of  the  railroad  excels  that  of  any 
other  agent  of  transportation;  it  can  go  over  mountains  or 
tunnel  through  them.  In  certainty  its  superiority  is  marked ; 
floods  and  snows  may  delay  it  for  a  day,  but  there  is  no  sea- 
sonal stoppage  of  traffic.  In  speed,  the  railroad  so  far  excels 
that  the  canal  can  survive  only  by  dividing  the  traffic,  taking 
the  lower  grades  of  freight,  and  leaving  to  the  railroad  the 
passenger  traffic  and  fast  freight. 

Because  of  these  qualities,  the  extension  of  the  railroads  Results  of 
in  the  last  fifty  years  has  been  so  rapid  that  it  has  not  given  ^thof 
time  for  a  gradual  adaptation  of  industry.     It  has  worked   railroads 
in  many  places  revolutionary  changes.    The  building  of  rail- 
roads in  the  Mississippi  valley  in  the  seventies  lowered  the 

34 


530  EAILEOADS  AND  INDUSTRY  [CH.  54 

value  of  Eastern  farms,  ruined  many  English  farmers,  and 
depressed  the  peasantry  in  all  western  Europe.  With  the 
prices  that  resulted  when  the  fertile  lands  of  the  Western 
prairies  were  opened  to  the  world's  markets,  the  stony  and 
worked-out  lands  of  the  older  districts  could  not  compete. 
Great  regions  are  still  to  be  opened  in  this  manner  in  Russia, 
Siberia,  Africa,  and  South  America.  While  one  can  only 
speculate  upon  the  effects  this  development  will  have,  the 
changes  promise  to  be  less  sudden  and  tremendous  than  those 
of  the  last  twenty  years.  Many  minor  changes,  of  no  less 
moment  in  limited  districts,  result  from  the  building  of  rail- 
roads. Local  trading-centers  decrease  in  importance.  Vil- 
lages and  towns,  hoping  to  be  enriched  by  the  railroads,  see 
trade  going  to  the  cities.  Commerce  becomes  centralized. 
Enormous  increase  of  value  at  a  few  points  is  offset  by  losses 
in  other  localities. 

§  III.      DISCRIMINATION  IN   RATES   ON   RAILROADS 

Monopoly  1-  The  railroad  has  more  monopoly  power  in  fixing  rates 
railroads  at  P0^nts  alon9  ^s  ^nes  than  is  the  case  with  other  agents  of 
transportation.  The  ownership  of  the  wagons,  ships,  and  canal- 
boats  of  a  country  is  usually  divided.  Every  point  along 
the  line  of  the  turnpike  or  the  canal  and  at  ocean  ports  enjoys 
competition  between  carriers,  the  great  shipping  combinations 
not  having  been  successfully  formed  as  yet.  In  the  early  days 
of  the  railroads  it  was  believed  that  a  company  or  the  gov- 
ernment would  own  the  rails  and  charge  toll  to  the  different 
carriers,  who  would  own  cars  and  conduct  the  traffic  as  was 
done  on  the  canals.  Experience  soon  showed  the  utter  im- 
practicability of  this  scheme  and  the  need  of  unified  manage- 
ment. The  railroad,  therefore,  has  a  monopoly  at  all  points 
on  its  line  not  touched  by  other  carriers.  This,  like  all  other 
monopoly,  is  limited  by  the  need  to  secure  some  business  and 
to  meet  competition  at  terminal  points.  The  railroads  in 
private  hands  early  began  to  "charge  what  the  traffic  would 


§111]          DISCRIMINATION  IN  BATES  ON  RAILROADS  531 

bear"  at  every  station,  thus  practising  various  forms  of  dis- 
crimination disastrous  in  their  effects  on  the  citizens. 

2.  Discrimination  as  to  goods  is  charging  more  for  trans-  Discrimin 
porting  one  kind  of  goods  than  for  another  without  a  corre-  tionasto 
sponding  difference  in  the  cost.  When  reasonably  understood, 

this  proposition  does  not  apply  to  a  higher  charge  for  goods 
of  greater  bulk,  as  more  per  pound  for  feathers  than  for  iron, 
the  ' '  dead  weight ' '  of  car  being  much  greater  in  one  case  than 
in  the  other.  It  does  not  apply  where  there  is  a  difference  in 
risk,  as  in  carrying  bricks  and  powder,  or  coal  and  crockery ; 
nor  where  there  is  a  difference  in  trouble,  as  in  shipping  live 
stock  and  wheat.  Any  difference  that  can  reasonably  be  ex- 
plained as  due  to  a  difference  in  cost  is  not  discrimination ;  on 
the  other  hand  a  difference  in  cost  without  a  difference  in 
rate  is  discrimination.  Discrimination  as  to  goods  may  be 
by  value,  as  low  rates  for  heavy,  cheap  goods  and  high  rates 
for  lighter,  valuable  ones.  Coal  always  goes  at  a  low  rate  as 
compared  with  dry  goods,  and  sometimes  more  is  charged  for 
coal  to  be  used  for  gas  than  for  coal  to  be  used  for  heating 
purposes.  Discrimination  as  to  goods  is  the  most  usual  and, 
if  reasonably  employed,  one  of  the  most  justifiable  of  the 
various  kinds  of  rate  discriminations. 

3.  Discrimination  between  places   (local  discrimination)    Local  dis- 
is  charging  different  rates  to  two  localities  for  substantially  criminati 
the  same  service.    This  occurs  when  local  rates  are  high  and 
through  rates  are  low ;  when  rates  at  local  points  are  high  and 

at  competing  points  are  low;  when  less  is  charged  for  ship- 
ments consigned  to  foreign  ports  than  for  domestic  ship- 
ments; when  more  is  charged  for  goods  going  east  than  for 
goods  going  west.  The  causes  of  local  discrimination  are :  first, 
water-competition,  found  at  great  trade  centers  such  as  New 
York  and  San  Francisco ;  second,  differences  in  terminal  fa- 
cilities, making  some  places  better  shipping-points  than 
others;  third,  competition  by  other  railroads,  which  is  con- 
centrated at  certain  points,  only  four  thousand  (one  tenth) 
of  the  stations  of  the  United  States  being  junctions ;  fourth, 


532 


RAILROADS  AND  INDUSTRY 


ICH.  54 


Its  effects 


Personal 
discrimina- 
tion 


the  influence  of  powerful  individuals  or  large  corporations 
and  the  personal  favoritism  shown  by  railroad  officials. 

The  effect  of  discrimination  is  to  develop  some  districts 
and  depress  others ;  to  stimulate  cities  and  blight  villages ;  to 
destroy  established  industries;  to  foster  monopolies  at  fa- 
vored points ;  and  to  sacrifice  the  future  revenues  of  the  road 
by  forcing  industry  to  move  to  the  competing  points  to  get 
the  low  rates.  The  power  of  railroad  officials  arbitrarily  to 
cause  rates  to  rise  or  fall  is  happily  limited  in  practice  by 
the  need  of  earning  as  large  and  as  regular  an  income  as  pos- 
sible, but  even  as  exercised  it  has  been  at  times  as  great  as 
that  possessed  by  many  political  rulers. 

4.  Discrimination  between  shippers  (personal  discrimina- 
tion) is  charging  one  person  more  than  another  for  substan- 
tially the  same  service.  This  most  odious  of  railroad  vices, 
rarely  practised  openly,  is  done  by  false  billing  of  weight,  by 
wrong  descriptions  or  false  classification  to  reduce  the  charge 
below  published  rate-sheets,  by  carrying  some  goods  free,  by 
issuing  passes  to  one  and  not  to  all  patrons  under  the  same 
conditions,  or  by  donations  or  rebates  after  the  regular  rate 
has  been  paid.  In  some  cases  a  subordinate  agent  shares  his 
commission  with  the  shipper,  and  the  transaction  does  not 
appear  on  the  books  of  the  company.  In  other  cases  favored 
shippers  are  given  secret  information  that  the  rate  is  to  be 
changed,  so  that  they  are  enabled  to  regulate  their  shipments 
to  secure  the  lower  rate. 

One  group  of  reasons  for  personal  discrimination  is  con- 
nected with  the  interests  of  the  road.  It  is  to  build  up  new 
business ;  it  is  to  make  competition  with  rival  roads  more  ef- 
fective by  favoring  certain  agents,  as  is  very  commonly  done 
in  the  Western  grain  business ;  it  is  to  exclude  competition,  as 
by  refusing  to  make  a  rate  from  a  connecting  line  or  to  re- 
ceive materials  for  a  new  railroad  which  is  to  be  a  competitor ; 
and  it  is  to  satisfy  large  shippers  whose  power,  skill,  and 
persistence  make  the  concession  necessary.  Another  group 
of  reasons  has  to  do  with  the  interests  of  company  officials. 


DISCRIMINATION  IN  RATES  ON   RAILROADS          533 

It  is  to  enable  them  to  grant  special  favors  to  friends ;  or  it  is 
to  build  up  a  business  in  which  they  are  interested;  or  it  is 
to  earn  a  bribe  that  has  been  given  them. 

That  the  evils  of  personal  discrimination  are  great,  need  Evils  of 
hardly  be  said.    It  introduces  uncertainty,  fear,  and  danger 
into  all  business;  it  causes  business  men  to  waste,  socially  tion 
viewed,  an  enormous  fund  of  energy  to  get  good  rates  and  to 
guard  against  surprises;  it  grants  unearned  fortunes  and 
destroys  those  honestly  made;  it  gives  enormous  power  and 
presents  strong  temptations  to  railroad  officials  to  injure  the 
interests  of  the  stockholders  on  the  one  hand  and  of  the  public 
on  the  other. 

Apart  from  government,  the  railroad  represents  the  great- 
est single  economic  factor  in  personal  distribution.  It  has 
introduced  a  new  form  of  problem  into  economic  society.  It 
has  created  a  monopoly  comparable  to  the  prerogatives  of 
feudal  lords.  No  other  industrial  agency  in  private  hands 
so  affects  all  the  producing  forces  of  society  and  exercises 
such  a  potent  influence  on  values. 


CHAPTER  55 
THE  PUBLIC   NATURE   OF  RAILROADS 

§  I.      PUBLIC  PRIVILEGES  OF  RAILROAD   CORPORATIONS 

1.  Railroads  enjoy  peculiar  public  privileges  through 
their  charters,  franchises,  and  the  right  of  eminent  domain. 
Railroads  in  our  country  are  owned  by  private  corporations 
and  are  managed  by  private  citizens,  not,  as  in  some  countries, 
by  public  officials.  They  have  been  built  under  the  motive 
of  private  enterprise,  in  the  interest  of  the  investor,  not  as 
a  charity  or  as  a  public  benefaction.  Railroad-building  ap- 
pears thus  at  first  glance  to  be  a  case  of  free  competition 
where  public  interests  are  served  in  the  following  of  private 
interests.  But,  looked  at  more  closely,  it  may  be  seen  to  be 
in  many  ways  different  from  the  ordinary  competitive  busi- 
ness. Competition  would  make  the  building  of  railroads  a 
matter  of  bargain  with  proprietors  along  the  line,  and  an  ob- 
durate farmer  could  compel  a  long  detour  or  could  block  the 
whole  undertaking.  But  the  public  says :  a  public  enterprise 
is  of  more  importance  than  the  interests  of  a  single  farmer. 
By  charter  or  by  franchise  the  railroad  is  granted  the  power 
of  eminent  domain,  whereby  the  property  of  private  citizens 
may  be  taken  from  them  at  an  appraised  valuation.  The  man- 
ufacturer, enjoying  no  such  privilege,  can  only  by  ordinary 
purchase  obtain  a  site  urgently  needed  for  his  business.  Why 
may  the  railway  exercise  the  sovereign  power  of  government 
and  invade  other  private  property  rights  ?  Because  the  rail- 
way is  peculiarly  " affected  with  a  public  interest,"  The 
primary  object  is  not  to  favor  the  railroads,  but  to  benefit 

534 


§l]     PUBLIC  PRIVILEGES  OF  RAILROAD  CORPORATIONS    535 

the  community.  These  charters  and  franchises  are  granted 
sparingly  in  most  European  countries.  In  this  country  they 
have  been  granted  recklessly,  often  in  general  laws,  by  states 
keen  in  their  rivalry  for  railroad  extension.  When  thus  great 
public  privileges  had  been  granted  without  reserve  to  private 
corporations,  it  was  realized,  too  late  in  many  cases,  that  a 
mistake  had  been  made  and  that  an  impossible  situation  had 
been  created. 

2.  In  America  and  in  many  other  countries,  large  grants  state  and 
of  lands  and  money  have  been  made  to  railroads  on  the 
ground  of  their  peculiar  public  nature.  Railroads  were 
granted  not  only  peculiar  powers  and  privileges,  but  also  ma- 
terial aid.  The  railroad  enterprise  was  uncertain,  the  possi- 
bilities of  its  growth  could  not  be  foreseen,  and  private  capi- 
tal would  not  invest  without  great  inducements.  In  European 
countries  where  capitalists  were  less  enterprising  or  venture- 
some than  in  America,  railroad  extension  was  very  slow  ex- 
cept where  the  state  in  some  manner  extended  its  aid  to  the 
enterprise.  The  American  states  abandoned  the  principle 
of  non-interference  most  recklessly,  and  vied  with  each  other 
in  giving  lands,  money,  and  privileges,  in  loaning  bonds,  in 
subscribing  for  stock,  and  in  releasing  from  taxation.  These 
protective  measures  fostering  a  special  enterprise  were  ex- 
pected by  increasing  wealth  to  diffuse  a  greater  welfare 
throughout  the  community.  Many  of  the  states  were  forced 
to  the  point  of  bankruptcy  by  their  reckless  generosity,  and 
some  of  them  repudiated  the  debts  thus  incurred.  The  na- 
tional government  then  took  up  the  same  policy  and  granted 
lands  to  the  states  to  be  used  for  this  purpose.  The  first 
example  of  this  was  the  grant  to  the  Illinois  Central  road,  in 
1850,  of  a  great  strip  of  land  through  the  state  from  north 
to  south.  Grants  were  made  in  fourteen  states,  covering 
tens  of  millions  of  acres  of  land.  Then  the  national  govern- 
ment, between  1863  and  1869,  aided  the  building  of  the  Pacific 
railroads  by  granting  outright  twenty  square  miles  of  land 
for  every  mile  of  track  and  by  loaning  the  credit  of  the  gov- 


536 


THE  PUBLIC  NATURE  OF  RAILROADS 


[CH.  55 


Railroad 
grants  by 
localities 


Investors' 
view  of 
railroads', 
obligations 


ernment  to  the  extent  of  fifty  million  dollars— a  debt  settled 
by  compromise  only  after  thirty  years.. 

Counties,  townships,  cities,  and  villages  along  the  line  of 
projected  roads  then  entered  into  keen  competition  to  secure 
them.  Bonds,  bonuses,  tax-exemptions,  and  many  special 
privileges  were  granted.  To  obtain  this  new  Aladdin's  lamp, 
this  great  wealth-bringer,  localities  mortgaged  their  pros- 
perity for  years  to  come.  The  promoters  bargained  skilfully 
for  these  grants,  playing  off  town  against  town,  cultivating 
the  speculative  spirit,  punishing  the  obdurate.  Not  the  civil 
engineer,  but  the  financial  engineer  platted  the  devious  lines 
of  many  a  railroad  on  the  level  prairies  of  America.  The 
effects  of  these  grants  were  in  many  cases  disastrous,  and 
since  1870  they  have  been  forbidden  in  a  number  of  states 
by  legislation  and  by  state  constitutions.  But  before  this  era 
of  generosity  ended,  probably  the  railroads  had  received  more 
public  aid  than  has  ever  been  given  to  any  other  form  of 
industry  in  private  hands. 

3.  The  railroads  are  now  generally  held  to  have  peculiar 
public  duties  corresponding  to  their  privileges.  Do  all  these 
grants  in  the  past  make  the  railroads  other  than  mere  private 
enterprises  ?  One  answer,  that  of  those  financially  interested 
in  the  railroads,  is  No.  They  say  that  the  bargain  was  a  fair 
one,  and  is  now  closed.  The  public  gave  because  it  expected 
benefit;  the  corporation  fulfilled  its  agreement  by  building 
the  road.  The  terms  of  the  charter,  as  granted,  determine 
the  rights  of  the  public;  but  no  new  terms  can  now  be 
read  into  it,  even  though  the  public  now  sees  the  question 
in  a  new  light.  Similar  grants,  though  not  so  large,  have 
been  made  to  other  industries.  Bounties  have  been  given  to 
sugar-factories ;  tariffs  have  favored  iron-forges  and  woolen- 
mills  ;  factories  have  been  given,  by  competing  cities,  land  and 
exemption  from  taxation;  yet  no  attempt  is  made  on  that 
account  to  control  these  businesses  in  a  peculiar  way  and  to 
treat  them  as  public  enterprises.  So,  it  is  said,  the  railroad 
is  still  merely  a  private  business. 


$1]    PUBLIC   PRIVILEGES  OF  RAILROAD  CORPORATIONS     537 

But  the  social  answer  is  stronger  than  this.  As  to  the  pre-  social  view 
cedent  of  tariff-  and  bounty-favored  enterprises,  most  careful  of  railroads> 
students  would  admit  a  close  analogy  in  the  two  cases,  but 
would  maintain  that  the  tariff  policy  also  has  been  carried 
to  an  unjustifiable  extreme,  and  that  it  could  not  be  used  to 
vindicate  a  still  greater  assault  on  public  rights.  But,  fur- 
ther, privileges  of  railroads  are  greater  in  amount  and  more 
important  in  character  than  those  granted  to  »any  ordinary 
private  enterprise.  The  legislatures  recognize  constantly  the 
peculiar  public  functions  of  the  railroads.  In  other  private 
enterprises,  investors  take  all  the  risk ;  legislatures  and  courts 
recognize  the  duty  of  guarding,  where  possible,  the  invest- 
ment of  capital  in  railroads.  Laws  have  been  passed  in 
several  states  to  protect  the  railroads  against  ticket-scalping. 
Whenever  the  question  comes  before  them,  the  courts  main- 
tain the  right  of  the  railroads  to  earn  a  fair  dividend.  Pri- 
vate enterprise  has  been  invited  to  undertake  a  public  work, 
yet  public  interests  are  paramount. 

If  an  extremely  abstract  view  is  taken  there  is  danger  of  Need  of 
losing  sight  of  the  real  problem,  which  is  that  of  harmonizing  J|^°*uc~ 
these  two  interests  in  thought  and  in  public  policy.    Yet  the  and  private 
extreme  advocates  of  the  private  control  of  railroads  have  mterests 
resented  indignantly  any  public  interference  with  railroad 
rates  and  with  railroad  management  as  an  infringement  of 
individual  liberty.    At  the  time  of  the  passage  of  the  Inter- 
state Commerce  Act  this  position  was  inconsistently  taken  by 
those  in  whose  interests  free  competition  had  been  violently 
set  aside  at  the  very  outset  of  railroad  construction,  and  for 
whom  government  interference  had  made  possible  great  for- 
tunes.    The  railroads  cannot  change  from  a  public  to  a  pri- 
vate character  just  as  it  suits  their  convenience.    They  cannot 
be  allowed  to  play  Dr.  Jekyll  and  Mr.  Hyde ;  smooth  and 
affable  in  the  character  of  public  agents  when  public  advan- 
tages are  to  be  gained,  and  then  as  private  enterprises  ugly 
and  scowling,  flouting  the  public  interests,  charging  all  the 
traffic  will  bear,  and  resisting  all  reasonable  regulation  and 


538 


THE  PUBLIC  NATURE  OF  RAILROADS 


[CH.  55 


conditions.  Though  railroads  are  private  enterprises  as  re- 
gards the  character  of  the  investment,  they  are  public  enter- 
prises as  to  their  privileges,  functions,  and  obligations. 


Railroad 
rates  like 

taxes 


Political 
influence  of 
railroads 


§  II.      POLITICAL  AND  ECONOMIC  POWER  OF  RAILROAD  MANAGERS 

1.  In  various  ways  railroad  managers  exercise  great  po- 
litical influence  and  power.  Some  writers  maintain  that  the 
power  to  make  rates  on  railroads  is  a  power  of  taxation. 
They  point  out  that  if  rates  are  not  subject  to  fixed  rules 
imposed  by  the  state,  the  private  managers  of  railroads  wield 
the  power  of  the  law-maker.  By  changing  the  rates  on  foreign 
exports  or  imports,  the  railroads  frequently  have  made  or 
nullified  a  protective  tariff  and  have  defeated  the  intention 
of  the  legislature.  High  rates  on  state-owned  roads  have 
openly  been  used  in  lieu  of  protective  duties.  These  facts  go 
to  show  that  a  change  of  railroad  rates  between  two  places 
within  the  country  is  similar  in  effect  to  the  imposing  or  re- 
peal of  tariff  duties  between  them. 

The  wealth  and  industrial  importance  of  the  railroads  give 
them  widespread  political  power  in  other  ways.  It  is  com- 
monly charged  in  some  states  that  the  legislature  and  the 
courts  are  "  owned "  by  the  railroads.  The  railroads,  in  part 
because  they  are  the  victims  at  times  of  attempts  at  blackmail 
by  dishonest  public  officials,  are  compelled  in  self-defense  to 
maintain  a  lobby.  The  railroad  lobby,  defensive  and  offen- 
sive, is  in  many  states  the  all-powerful  ' '  third  house. ' '  Rail- 
roads even  have  their  agents  in  the  primaries,  they  enter 
political  conventions,  they  dictate  nominations  from  the  low- 
est office  up  to  that  of  governor,  and  they  elect  judges  and 
legislators.  The  extent  to  which  this  is  done  differs  according 
as  the  railroads  have  large  or  small  interests  within  the  state. 
How  is  this  great  political  problem  to  be  met  except  by  an 
appreciation  of  its  importance  and  by  a  growth  of  public 
integrity  ? 
2.  The  economic  power  of  the  higher  railroad  officials  en- 


§11]  POLITICAL  AND  ECONOMIC   POWER  539 

ables  them  to  exercise  certain  functions  of  an  important  pub-  The  com- 
lic  nature.     When  the  railroad  was  a  young  industry,  its  {Jonsof11 
essentially  public  nature  was  not  recognized.    It  was  at  first  railroad 
thought  to  be  simply  an  iron-track  turnpike  to  which  the  old  d 
English  law  of  common  carriers  would  apply.    As  this  and 
similar  notions  proved  illusory,  the  railroad  manager  be- 
came invested  with  complex  and  often  conflicting  duties  to 
the  stockholders  and  to  the  public.    He  wore  his  conscience- 
burden  lightly,  and  frequently  made  little  attempt  to  meet 
the  one  and  no  attempt  whatever  to  meet  the  other  obligation. 
The  new  field  offered  for  speculation  gave  opportunities  for 
great  private  fortunes.    There  were  no  precedents,  no  ripened 
public  opinion,  no  established  code  of  ethics,  to  govern.     It 
was  a  betrayal  of  the  interests  of  the  stockholders  when  di- 
rectors formed  "construction  companies"  and  granted  con- 
tracts to  themselves  at  outrageously  high  prices.    It  was  an 
injury  not  only  to  shippers,  but  also  to  the  stockholders,  when 
special  rates  were  granted  to  friends  and  to  industries  in 
which  the  directors  were  interested. 

It  is  believed  that  a  better  code  of  business  morality  has   unclear 
developed,  and  that  the  officers'  relation  of  trusteeship  toward  £°™ ^n 
the  shareholders  is  now  more  often  recognized.     But  prac-  railroads' 
tical  ethics  need  to  be  developed  much  farther  than  this.    A  J£j^ 
railroad  manager  is  engaged  by  the  stockholders,  is  respon- 
sible to  them,  and  looks  to  them  for  his  promotion.     Hence 
their  interests  are  uppermost  whenever  the  welfare  of  the 
public  is  not  in  harmony  with  the  earning  of  liberal  divi- 
dends.   The  manager  feels  bound  to  defend  the  principle  of 
"charging  what  the  traffic  will  bear"  in  the  case  of  each  in- 
dividual, locality,  and  kind  of  goods.    If  this  ruins  some  men 
and  enriches  others,  if  it  destroys  the  prosperity  of  cities  to 
increase  the  earnings  of  the  road,  at  all  events  he  feels  he  has 
done  his  full  duty.    Railroad  directors  do  not  yet  recognize, 
and  possibly  never  will,  that  their  office  is  more  than  a  pri- 
vate trusteeship,  that  it  is  a  public  trust. 

3.     The  progress  of  consolidation  among  railroads  is  put- 


540 


THE  PUBLIC  NATURE   OF  RAILROADS 


[CIL  55 


Progress  of 
railroad 
consolida- 
tion 


Economic 
results  of 
consolida- 
tion 


ting  into  fewer  hands  greater  financial  and  economic  power. 
The  early  railroads,  many  of  which  were  built  in  sections 
of  a  few  miles  in  length,  have  been  slowly  welded  into  con- 
tinuous trunk  lines  with  many  branches.  The  New  York 
Central  between  Albany  and  Buffalo  was  a  consolidation,  by 
Commodore  Yanderbilt,  of  sixteen  short  lines.  The  Pennsyl- 
vania system  was  formed  link  by  link  from  scores  of  small 
roads.  The  growth  of  consolidation  recently  has  been  more 
rapid  than  ever  before.  Sixty  per  cent,  of  the  mileage  of  the 
United  States  is  under  the  control  of  five  interests ;  seventy- 
five  per  cent,  is  controlled  by  a  group  of  men  that  can  sit 
about  one  table.  The  country  is  being  divided  territorially 
into  great  railroad  domains,  within  each  of  which  one  finan- 
cial interest  is  dominant.  Great  financial  alliances  and  *  *  com- 
munity of  interests"  still  further  unify  the  policy  of  the 
leading  roads. 

Toward  this  result  strong  economic  forces  are  working. 
Consolidation  has  many  technical  advantages :  it  saves  time, 
reduces  the  unit  cost  of  administration  and  of  handling  goods, 
gives  better  use  of  the  rolling  stock  and  of  the  terminal 
facilities  of  the  railroads,  and  insures  continuous  train  ser- 
vice. It  has  the  advantages  of  other  large  production  and  the 
possible  economies  of  the  trusts.  Most  important,  however, 
from  the  point  of  view  of  the  railroads,  is  the  prevention 
of  competition  and  the  making  possible  of  higher  rates  and 
larger  dividends.  The  statement  that  competition  is  not  an 
effective  regulator  of  railroads  often  is  misunderstood  to 
mean  that  it  in  no  way  acts  on  rates.  It  is  true  that  compe- 
tition between  roads  does  not  prevent  discrimination  and 
excessive  charges  between  stations  on  one  line  only ;  but  com- 
petition usually  has  acted  powerfully  at  well-recognized 
" competing  points."  The  larger  the  area  controlled  by  one 
management,  the  fewer  are  the  competing  points ;  the  larger, 
therefore,  is  the  power  over  the  rate  and  the  more  completely 
the  monopoly  principle  applies.  It  is  a  grim  jest  to  say  that 
consolidation  does  not  change  the  railroad  situation  as  re- 
gards the  question  of  rates. 


§111]  COMMISSIONS   TO  CONTROL   RAILROADS  541 


§  III.      COMMISSIONS  TO   CONTROL  RAILROADS 

1.  Most  of  the  states  have  undertaken,  through  commis-  Railroad 
sions,  to  regulate  the  railroads  in  the  public  interest.  When  ^J1*^*11 
it  became  evident  that  public  and  private  interests  in  the  remedies 
railroads  were  so  divergent,  it  still  was  not  easy  to  determine 
how  the  public  was  to  be  safeguarded.  At  first,  some  general 
conditions  such  as  maximum  rates  were  inserted  in  the  laws 
and  charters ;  but  these  were  not  adaptable  to  changing  con- 
ditions and,  for  lack  of  administrative  agents,  could  not  be 
enforced.  The  early  efforts  at  state  ownership  were,  as  was 
noted  above,  futile  and  disastrous,  the  remedy  of  state  owner- 
ship, as  then  applied,  being  worse  than  the  disease.  The 
old  law  of  common  carriers  gave  to  individual  shippers 
an  uncertain  redress  in  the  courts  for  unreasonable  rates; 
but  the  remedy  was  costly  because  the  aggrieved  shipper  had 
to  employ  counsel,  to  gather  evidence,  and  to  risk  the  penalty 
of  failure;  it  was  slow,  for  while  delay  was  death  to  the 
shipper's  business,  cases  hung  for  months  or  years  in  the 
courts;  it  was  ineffectual,  for  even  when  the  case  was  won, 
the  shipper  was  not  repaid  for  all  his  losses,  and  the  same 
discrimination  could  be  immediately  repeated  against  him 
and  other  shippers. 

Attempting  to  remedy  these  evils,  thirty-one  of  the  states   object  and 
have  appointed  commissions  and,  as  the  most  important  states  JJJ^JJ^0* 
are  included,  this  mode  of  regulation  applies  probably  to  four  commis- 
fifths  of  all  traffic  beginning  and  ending  in  a  single  state.  Slons 
These  commissions  differ  in  power,  but  in  general  they  at- 
tempt to  prevent  excessive  discrimination  in  rates  and  to 
check  all  railroad  practices  injurious  to  the  public  welfare. 
The  commission  principle,  strongly  opposed  at  first  by  the 
railroads,  has  been  upheld  by  the  courts  and  is  now  an  es- 
tablished public  policy.     The  state  commissions,  however, 
have  fallen  far  short  of  a  solution  of  the  problem.    Though 
they  have  done  much  to  make  the  accounts  of  the  railroads 
intelligible,  something  to  make  the  rates  reasonable  and  sub- 


542 


THE  PUBLIC  NATURE  OF  BAILBOADS 


[CH.  55 


Passage  of 
the  Inter- 
state Com- 
merce Act 


Its  pro- 
visions 


ject  to  rule,  and  much  to  educate  public  sentiment,  on  the 
whole  their  results  have  been  disappointing.  It  has  been  diffi- 
cult to  get  commissioners  at  once  strong,  able,  and  honest ;  the 
public  does  not  yet  know  its  own  mind  well  enough  to  support 
the  commissions  properly;  and — more  fatal  weakness  still— 
the  courts  early  decided  that  state  commissions  could  regulate 
only  the  traffic  originating  and  ending  within  the  state,  and 
this  left  untouched  the  much  greater  volume  and  more  im- 
portant class  of  interstate  traffic. 

2.  The  Interstate  Commerce  Commission  is  an  agency  by 
which  it  was  hoped  to  secure  a  uniform  national  public  con- 
trol of  railroads.  Public  hostility  to  private  railroad  man- 
agement was  greatest  in  the  regions  where  the  most  rapid 
building  of  roads  occurred  from  1866  to  1873.  One  center 
of  grievances  was  in  * '  the  granger  states ' '  of  Illinois,  Wiscon- 
sin, Kansas,  Nebraska,  Iowa,  and  Minnesota;  another  center 
was  in  the  oil  regions  of  Ohio  and  Pennsylvania.  The  Eastern 
states  were  not  without  their  troubles,  for  the  report  of  the 
Hepburn  Committee  of  the  New  York  legislature  in  1879 
shows  that  discrimination  between  shippers  prevailed  to  an 
almost  incredible  degree  in  every  portion  of  New  York  state. 
When  the  courts,  in  1886,  decided  that  the  greater  portion 
of  the  railroad  rates  could  not  be  treated  by  state  commis- 
sions, national  control  was  loudly  demanded.  Scores  of  bills 
were  presented  to  Congress  between  1870  and  1886,  and,  de- 
spite the  bitter  opposition  of  the  railroads,  the  Interstate 
Commerce  Act  was  passed  in  1887. 

The  act  laid  down  some  general  rules:  that  rates  should 
be  just  and  reasonable;  that  railroads  should  not  pool,  or 
agree  to  divide,  their  earnings  to  avoid  competition;  that 
they  should,  unless  expressly  excused,  fix  rates  in  accordance 
with  the  long-  and  short-haul  principle  (to  charge  no  more 
for  a  shorter  distance  than  for  a  longer  one  on  the  same  line 
and  in  the  same  direction,  the  shorter  being  included  within 
the  longer).  The  act  provided  for  a  commission  of  five  men, 
to  be  appointed  by  the  President,  which  might  require  uni- 


$m]  COMMISSIONS   TO^SQNTROL  RAILROADS  543 

^^^^^^^ssa^BK^i^^^ 

form  accounts  from  the  railroads,  and  which  should  enforce 
the  provisions  of  the  act. 

3.  The  object  of  the  Interstate  Commerce  Act  has  been  Results  of 
but  imperfectly  attained.  This  brief  proposition  sums  up  tbeact 
the  story  of  years  of  efforts  and  defeated  hopes.  The  powers 
of  the  commission  have  proved  inadequate  to  attain  the  main 
purposes  of  the  act— the  prevention  of  discrimination  and  the 
securing  of  steady  and  equitable  rates  to  all  shippers.  By 
the  decisions  of  the  federal  courts,  the  commission's  power 
has  been  reduced  far  below  the  intentions  of  the  Congress 
that  passed  the  law.  The  railroads  have  in  many  cases  re- 
fused to  obey  the  orders  of  the  commission  and  have  suc- 
ceeded in  maintaining  their  refusal.  Admirable  results  have 
been  secured  in  the  way  of  uniform  accounting,  uniformity 
of  rates  has  been  somewhat  furthered  at  times,  and  the  public 
has  been  in  many  cases  enlightened.  But  the  greatest  evils 
remain.  Railroads  still  give  secret  rates  in  great  numbers; 
many  competent  witnesses  before  the  Industrial  Commission 
in  1900  and  1901  testified  that  discrimination  had  never  been 
worse.  From  time  to  time  the  recognition  of  the  injury  to 
dividends  wrought  by  discriminating  rates  prompts  some  rail- 
road to  offer  its  cooperation  to  the  commission,  and  this  in- 
spires new  hopes  of  an  effective  administration  of  the  act. 
The  pressure  of  competition,  however,  soon  forces  the 
penitent  road  back  into  its  old  ways.  On  one  thing  the 
railroads  and  the  commission  are  agreed :  that  pooling  should 
be  permitted,  though  the  commission  wishes  to  have  this 
under  strict  supervision.  To  this  point  the  public  has  not 
yet  advanced. 

Despite  the  general  acceptance  now  of  the  principle  that  The  railroad 
the  railroads  should  be  controlled  in  the  public  interest,  ^^ 
despite  the  barren  legal  triumph  of  the  commission  prin- 
ciple, it  is  evident  that  the  railroad  is  not  yet  under  social 
control.     The  future  must  determine  whether  the  solution 
is  to  be  found  in  effective  public  regulation  or  in  public 
ownership. 


CHAPTER  56 
PUBLIC  POLICY  AS  TO  CONTROL  OF  INDUSTRY 

§  I.      STATE  REGULATION  OF  CORPORATE  INDUSTRY 

The  social          1.     The  great  increase  of  late  in  the  number  of  industries 
problems  of    under  corporate  control  has  brought  new  problems  of  social 

corporations 

regulation.  Inventions,  machinery,  better  transportation, 
better  communication,  widening  markets,  have  united  to  fa- 
vor large-scale  production,  and  this  in  turn  to  multiply  cor- 
porations. Corporate  organization  makes  possible  greater 
massing  of  capital,  greater  stability  of  policy,  and  (because 
not  dependent  on  a  single  life)  greater  permanence  than  does 
individual  ownership.  With  these  advantages  the  corpora- 
tion brings  also  new  social  problems.  The  relations  in  cor- 
porate business  are  more  complex  than  those  in  individual 
enterprise.  The  ordinary  stockholder  cannot  have  personal 
knowledge  of  the  business  or  exercise  personal  supervision 
over  his  investment.  The  corporate  official  controls  chiefly 
not  his  own  wealth,  but  the  wealth  of  others.  When  men 
deal  personally  with  each  other  their  sympathies  are  more 
appealed  to.  But,  as  noted  in  the  case  of  the  railroad,  the 
corporate  official  at  best  seeks  to  satisfy  his  employers,  often 
to  the  detriment  both  of  the  employes  and  of  the  public. 
Corporations  are  "soulless"  because  they  permit  less  of  the 
close  personal  relation  that  makes  for  morality.  At  various 
points  in  these  later  chapters  on  the  relation  of  the  state  to 
industry,  mention  has  been  made  of  the  measures  society  has 
taken  to  regulate  corporate  industry.  The  purpose  now  is  to 
survey  the  field  more  systematically  and  to  see  the  extent 

544 


§1]        STATE  REGULATION  OF  CORPORATE  INDUSTRY      545 

of  this  regulation,  the  difficulties  arising,  and  the  principles 
involved. 

2.  Numerous  laws  and  commissions  recently  have  been  Examples  of 
established  to  provide  public  regulation  of  industry.  The  J^^^_" 
Interstate  Commerce  Commission  is  the  most  prominent  of  porate 
the  agencies  for  regulating  corporate  industry,  as  the  railroad  industry 
problem  is  the  most  prominent  of  the  corporation  questions. 
But  before  the  advent  of  the  railroad,  banks  had  been  recog- 
nized as  having  an  exceptional  public  character.  Not  only 
stockholders,  investors,  depositors,  and  note-holders,  but  a 
large  part  of  the  public  suffers  losses  by  the  failure  of  banks. 
As  investigation  by  the  various  interested  persons  is  quite 
impossible,  the  state  through  its  agents  inspects  the  books  of 
the  bank  in  a  manner  not  thought  of  in  the  case  of  ordinary 
private  business.  The  bank  commission  is  the  eye  of  the  pub- 
lic, safeguarding  the  public  welfare.  State  inspection  of 
insurance  companies,  a  later  kind  of  corporate  enterprise, 
grew  out  of  a  similar  need.  Insurance  to  provide  for  sickness, 
old  age,  or  death  is  socially  desirable  and  is  possible  in  an 
equitable  way  only  by  the  association  of  a  large  number  of 
policy-holders.  But  inspection  of  the  business  by  each  policy- 
holder  being  impossible,  regulation  and  control  through  some 
public  agency  is  needed.  The  tax  commissions  now  found  in 
a  majority  of  the  states  have  been  created  principally  to  deal 
with  corporations.  In  California,  a  debris  commission  regu- 
lates the  relations  between  the  farmers  and  the  miners  using 
hydraulic  processes.  A  number  of  states  have  mining  com- 
missions, harbor  commissions,  labor  commissions,  boards  of 
arbitration,  and  other  similar  bodies.  The  increase  of  these 
public  agencies  to  regulate  corporate  industry  has  lately  been 
condemned  by  some  as  a  useless  multiplication  of  state  ma- 
chinery. Doubtless  some  commissions  have,  through  im- 
proper influences,  been  needlessly  created ;  others  having  im- 
portant duties  have  been  intrusted  to  incompetent  political 
appointees.  But  most  of  these  commissions  are  needed, 
though  at  first  their  work  may  be  ineffective. 

35 


546     PUBLIC  POLICY  AS  TO  CONTROL  OF  INDUSTRY    [CH.  56 


Helplessness 
of  the  small 
investor 


Steps  to- 
ward pub- 
licity to 
protect 
investors 


3.  There  is  a  strong  and  increasing  demand  for  publicity 
in  the  business  of  the  ordinary  corporation,  as  a  protection 
to  investors.  The  law  has  looked  upon  corporations,  with 
few  exceptions,  as  private  businesses,  having  the  right  to  keep 
every  detail  of  their  management  secret  from  their  rivals. 
The  inner  management,  therefore,  has  been  closely  hidden 
from  most  of  the  stockholders,  who,  in  the  economic  analysis, 
are  in  the  main  the  enterprisers.  More  and  more  the  business 
and  capital  of  the  country  has  thus  come  into  the  control  of 
the  few.  The  ordinary  investor  in  corporate  stock  "buys  a 
pig  in  a  poke ' '  and  trusts  to  the  integrity  of  officers  working 
behind  closed  doors,  responsible  to  no  one,  too  often  speculat- 
ing in  the  stock  of  their  own  companies.  The  unearned  gains 
thus  secured  have  tainted  with  dishonesty  many  a  large  for- 
tune. No  small  part  of  the  evil  is  the  closing  of  the  avenues 
of  safe  investment  to  the  small  capitalists,  giving  to  a  favored 
few  a  measure  of  monopoly  in  investments  yielding  large 
returns.  Only  recently  has  it  been  recognized  that  no  large 
corporation  can  now  be  a  private  business  in  the  old  sense. 
The  evolution  of  industry  has  left  investors  and  shareholders 
without  protection  in  advance  of  a  wrong,  and  usually  with- 
out legal  redress  when  a  wrong  has  been  committed. 

The  demand  for  some  remedy  for  a  condition  whose  seri- 
ousness has  been  steadily  increasing  has  not  come  so  much 
from  radical  quarters  as  from  business  and  financial  circles. 
In  England,  some  of  the  worst  abuses  have  been  corrected  by 
legislation.  In  1900,  a  bill  was  drafted  at  the  suggestion  of 
Theodore  Roosevelt,  then  Governor  of  New  York,  which 
aimed  eventually  to  make  the  corporation  a  quasi-public  in- 
stitution, open  to  inspection.  The  organizers  of  a  company 
voluntarily  accepting  the  act  were  to  be  personally  respon- 
sible for  the  statements  in  its  prospectus;  its  issue  of  stock 
was  to  be  limited  to  actual  investment  and  to  be  publicly 
made;  its  office  and  records  were  to  be  open  to  inspection. 
Though  public  opinion  was  not  ready  for  this  bill,  and  it 
failed  of  passage,  the  bureau  of  corporations  of  the  new  de- 


§l]        STATE  REGULATION  OF  CORPORATE  INDUSTRY      547 

partment  of  commerce  of  the  federal  government,  established 
in  1903  under  President  Roosevelt,  may  be  looked  upon  as  a 
fruit  of  this  initial  attempt. 

4.     Greater  publicity  of  corporation  business  is  essential  Broad  social 
in  the  interest  of  the  public.     With  the  interests  of  the  in-  JJJJj^* 
vestor  are  usually  united  more  general  public  interests;  but 
in  many  cases  the  two  groups  of  interests  conflict.     Some 
persons  favor  control  of  corporations  only  to  the  degree 
needed  to  protect  investors,  but  others  place  the  policy  on 
broader  social  grounds.    The  ability  of  a  manufacturing  cor- 
poration, at  times,  by  threats  of  removal,  to  coerce  unfair  • 
terms  from  the  community,  from  its  employees,  and  from 
those  who  supply  it  with  materials,  has  led  to  the  proposal 
that  factories  shall  be  forbidden  to  change  their  location 
without  the  consent  of  the  state. 

Especially  does  it  seem  desirable,  if  it  is  possible,  to  pre-  Publicity  to 
serve  the  benefits  of  competition,  by  forbidding  rates  and  JJJJJ^11 
agreements  in  restraint  of  trade.  The  old  English  idea,  in- 
herited in  our  law,  is  that  the  highest  price  that  can  be  got  in 
an  open  market,  under  ordinary  conditions,  is  in  general  a 
just  price.  The  control  of  any  line  of  industry  by  a  few  cor- 
porations makes  secret  agreement  much  more  easy,  and  thus 
replaces  a  general  market-price  by  a  discriminating  rate,  the 
highest  that  each  individual  will  bear.  A  trust's  price  might 
still  be  a  reasonable  one  if  the  seller  met  competition  in  every 
market;  but  it  is  not  reasonable  when  opposition  is  crushed 
by  local  and  by  individual  discriminations.  The  methods  by 
which  this  result  is  obtained  shrink  from  the  public  gaze. 
They  include  secret  agreements  with  railroad  agents,  a  sys- 
tem of  espionage  on  the  business  of  competitors,  secret 
cial  rates  to  the  competitor's  customers,  to  say  nothing  moiv 
of  corrupt  political  influence.  Publicity  in  corporation  ac- 
counts is  the  first  condition  to  a  public  and  uniform  price. 
The  need  thus  to  develop  potential  competition  is  especially 
strong  where  a  monopoly  in  a  natural  product  exists.  A 
more  general  recognition  of  the  public  nature  of  corporations 


548     PUBLIC  POLICY  AS  TO  CONTROL  OF  INDUSTRY    [CH.  56 

will  lead  to  further  legislation  and  to  the  appointment  of 
corporation  commissions,  as  has  been  done  already  in  some 
states. 


Growing 
need  of 
social  co- 
operation 


The  prac- 
tical limits 
of  legisla- 
tive reform 


§  II.      DIFFICULTIES  OF  PUBLIC  CONTROL  OF  INDUSTRY 

1.  The  progress  of  industry  is  compelling  greater  social 
contact  and  more  use  of  the  agencies  of  government.  The 
numerous  exemplifications  of  this  general  statement  that  have 
been  met  in  the  course  of  this  study  have  a  common  cause. 
In  simple  conditions  of  industry,  where  most  of  the  produc- 
tive energies  were  given  to  securing  the  necessities  of  life,  the 
struggle  of  men  was  with  nature.  Social  relations  then  were 
simple  and  crude,  such  as  those  of  chattel  slavery.  Now, 
most  men  get  their  livelihood  from  their  bargains  with  other 
men.  The  relations  of  men  with  nature  now  are  fewer,  and 
less  close ;  the  relations  of  men  with  men  are  more  numerous 
and  complex.  Efficient  cooperation  is  a  factor  in  production. 
Right  social  relations  are  more  essential  to  industry  than  a 
fertile  soil. 

The  social  institutions  of  any  community  are  its  answer, 
expressed  in  human  consciousness  and  in  formal  laws,  to  this 
difficult  problem  of  living  together.  Laws  and  ways  for 
regulating  industry  may  be  good  or  bad.  The  good  laws  are 
those  in  harmony  with  human  nature,  giving  the  best  motives 
for  work  and  the  greatest  happiness  both  in  the  effort  and  in 
its  reward.  The  merit  of  laws,  therefore,  is  relative  to  human 
nature;  those  good  for  one  kind  of  citizens  may  be  bad  for 
another.  Men  cannot  be  legislated  into  honesty  without 
limit.  The  best  that  is  possible  is  to  enact  laws  that  en- 
courage the  best  in  men  as  they  are.  A  dishonest  com- 
munity neither  has,  nor  is  capable  of  choosing,  men  honest 
enough  to  supervise  the  others.  Society  cannot,  by  any 
amount  of  tugging  and  pulling  on  legislative  boot-straps,  lift 
itself  above  its  own  moral  plane.  But  though  the  change  in 
formal  law  cannot  far  precede,  it  may  lag  behind  and  retard, 


§11]  DIFFICULTIES  OF  PUBLIC  CONTROL  549 

social  progress.  Law  tardily  adjusted  to  social  needs  tempts 
and  corrupts  men.  A  time  has  never  been  when  a  higher 
wisdom  could  not  have  corrected  some  ancient  grievance, 
have  leveled  some  unmerited  inequality,  and,  by  making  laws 
as  good  as  men  were  capable  of  administering  at  the  moment, 
have  freed  their  energies  for  further  advances.  It  is  only  a 
spirit  of  moderate  expectation  that  will  not  be  cast  down  by 
the  results  of  legal  "reforms."  Hence  it  cannot  be  hoped 
that  abuses  will  not  appear  in  the  attempts  to  regulate  private 
industry.  Fallible  men  make  mistakes  and  commit  injustice, 
sometimes  greater  than  that  which  they  are  seeking  to  pre- 
vent. 

2.  Legislative  interference  with  industry  presents  temp-/Locai 
tations  to  community  selfishness  to  misuse  social  legislation 
Community  greed  is  not  more  lovely  than  individual  greed.jegisiat 
Many  a  citizen  holds  up  a  high  standard  for  the  public  official 
and  bewails  the  corruptions  of  politics  when  the  legislator 
votes  for  his  own  interest  instea'd  of  for  his  constituents' 
interests.  Such  a  citizen  rarely  reflects  that  the  responsi- 
bility for  many  legislative  abuses  comes  back  to  the  commu- 
nity and  to  the  individual  voter.  Can  the  water  rise  higher 
than  its  source?  Is  it  a  high  conception  of  a  representative's 
duty  that  he  should  out-talk,  outwit,  and  out- vote  his  fellow- 
representatives,  to  get ' '  a  graft ' '  for  the  men  who  elect  him  ? 
In  many  communities,  the  one  public  question  of  importance 
is  tariff  legislation  in  favor  of  the  local  industries.  This 
selfish  issue  bribes  the  electorate,  and  blinds  it  and  its  legis- 
lator to  every  question  of  the  general  welfare.  A  great  in- 
dustrial commonwealth  steeps  its  public  life  in  corruption 
when  its  voters  sell  their  political  birthright  for  a  duty  on 
iron.  Many  congressmen  are  so  burdened  with  the  task  of 
securing  some  public  expenditure  in  their  district  to  help 
their  constituents  that  they  have  little  thought  and  less  inter- 
est to  give  to  larger  public  questions.  If  a  local  improvement 
will  furnish  labor  and  increase  the  value  of  surrounding 
property,  though  it  is  most  uneconomic  for  the  general  com- 


550     PUBLIC  POLICY  AS  TO  CONTEOL  OF  INDUSTRY    [CH.  56 

munity,  the  representative  is  expected  to  labor  hard  to  secure 
it.  Many  citizens  see  little  harm  in  "log-rolling"  by  the 
legislator, — that  is,  in  his  voting  for  a  law  without  merit  in 
order  to  get  another  law  that  his  constituents  want.  The 
guilt  of  this  worst  form  of  bribery  comes  back  to  the  commu- 
nity that  forces  its  representatives  to  such  a  course,  sinking 
public  morality  to  a  lower  level. 

3.  The  power  of  the  legislature  to  affect  private  fortunes 
Presen^s  strong  temptations  to  public  representatives.    That 
the  legislator  is  so  often  true  to  a  high  standard  of  public 
duty,  goes  to  illustrate  the  familiar  truth  that  the  individual 
moral  code  is  better  than  that  of  communities.     That  some 
individuals  betray  their  trust  is  less  surprising.    The  Credit- 
Mobilier  scandal,  in  connection  with  legislation  in  aid  of  the 
Union  Pacific  Railroad,  implicated  many  congressmen.     A 
few  years  ago,  in  one  of  the  greatest  states,  it  was  discov- 
ered that  an  innocent-looking  bill,  relating  to  the  rights  of 
property-owners  on  streams,  practically  involved  the  gift, 
to  a  ring  of  men,  of  a  quarter  of  a  billion  dollars'  worth  of 
coal-lands,  lying  under  the  navigable  streams,  and  belonging 
to  the  state.     Such  temptations  for  wealth-getting  are  too 
great  for  men  selected  solely  for  their  ability  to  obtain  offices 
and  pensions  for  political  supporters,  and  to  secure  class- 
legislation  for  reputable  citizens.    The  power  of  the  legisla- 
tive bodies  to  grant  franchises  and  to  permit  the  use  of  public 
property  to  corporations,  constantly  gives  opportunity  for 
dishonesty  and  occasion  for  scandal  in  the  larger  cities.    The 
histories  of  the  granting  of  franchises  in  New  York,  Phila- 
delphia, Pittsburg,  St.  Louis,  and  many  other  municipalities, 
are  full  of  black  pages.    Public  duties  are  too  heavy  for  the 
public  integrity.    Industrial  power  has  grown  faster  than  the 
civic  conscience,  and  somehow  the  balance  must  be  made  even. 

4.  The  power  of  the  courts  and  of  executive  officers  in 
the  interpreting  and  executing  of  laws  governing  business 
has  become  greater.     With  closer  contact  of  men  there  is 
greater  friction  in  social  relations,  and  litigation  increases. 


§111]  TREND  OF  POLICY  551 

Fortunes  turn  on  the  result  of  a  civil  suit.  While  juries 
often  are  corrupt,  yet  it  is  remarkable  how  well  the  courts 
have  kept  their  integrity  in  the  midst  of  great  temptations. 
Professional  pride  and  the  noble  traditions  of  the  English 
judiciary  strengthen  the  individual's  character  on  the  bench, 
not  infrequently  transforming  a  dishonest  lawyer  into  a 
just  judge;  but  popular  elections,  selfish  interests,  and  the 
social  forces  of  wealth  and  ambition  make  the  task  at  times 
too  heavy. 

The  executive  branch  of  government  is  necessarily  in-  integrity 
trusted  with  great  power,  increasing  with  the  extent  of  social  *{j^ ir 
regulation.  The  Secretary  of  the  Treasury  has  discretion  as  officials 
to  the  sale  and  purchase  of  bonds,  and  thus  can  affect  the 
rate  of  discount  and  the  selling  price  of  securities.  One 
man's  decision,  if  known  in  advance,  makes  possible  fortunes 
for  private  pockets.  A  recognition  of  the  importance  of  these 
facts,  which  are  typical  of  a  great  class  of  facts,  must  help 
to  develop  a  higher  sense  of  public  duty.  Patriotism  has 
been  thought  of  too  narrowly.  The  enemies  of  early  society 
were  outside  its  borders,  and  the  citizen  who  traitorously 
gave  them  aid  was  held  in  abhorrence.  Now,  independently, 
in  many  quarters  is  voiced  the  conviction  that  the  greatest 
enemies  of  society  are  within  its  borders,  and  that  political 
corruption  is  the  modern  form  of  treason.  A  higher  concep- 
tion of  civic  virtue  is  required  to  meet  the  added  tasks  of 
society.  Public  official  control  must  be  united  with  private 
industrial  control  in  a  way  to  present  the  fewest  temptations 
to  the  betrayal  of  public  trust.  Now,  as  never  before,  must 
be  felt  the  wisdom  of  Emerson's  words:  "The  best  political 
economy  is  the  care  and  culture  of  men." 

§  III.      TREND  OF  POLICY  AS  TO  PUBLIC  INDUSTRIAL  ACTIVITY 

1.     There  has  been  a  large  increase  of  state  socialism  in  Recent 
recent  years.    The  term  state  socialism,  broadly  understood,   ^J*' 
includes  all  the  forms  of  public  participation  in  industry  socialism 


552     PUBLIC  POLICY  AS   TO  CONTROL   OF   INDUSTRY    [CH.  5C 

that  have  been  passed  in  review :  ownership  by  towns,  cities, 
state,  or  nation;  laws  regulating  the  freedom  of  contract; 
agencies  to  inspect  conditions  and  to  enforce  the  laws;  com- 
missions to  supervise  and  control  corporate  industry.  From 
every  direction  comes  evidence  of  the  increase  of  state 
socialism  within  the  past  twenty-five  years.  To  those  accus- 
tomed to  think  of  the  spirit  of  the  Germanic  races  as  that  of 
individual  liberty  and  enterprise,  it  seems  remarkable  that 
this  increase  has  been  greater  among  people  of  Teutonic 
origin  (Germany,  England,  America,  Australia)  than  among 
those  of  Latin  race.  The  change  seems  to  be  a  part  of  the 
movement  of  democracy,  even  the  measures  of  Bismarck  in 
Germany  having  been  taken  to  ward  off  the  demands  of  the 
radical  party.  The  mere  name  of  socialism  no  longer  fright- 
ens the  citizens  of  a  free  state,  and  when  men  of  strong 
individualistic  spirit  even  claim  with  pride  that  they  are 
socialists,  the  meaning  of  that  term  is  becoming  very  vague 
indeed. 

varieties  of  2.  State  socialism  must  not  be  confused  with  collectivism, 
socialism  Qr  racncai  socialism.  The  word  socialism  is  so  variously  de- 
fined that  the  earnest  student  sometimes  despairs  of  getting 
a  clear  understanding  of  it.  The  thought  of  socialism  ranges 
from  the  simplest  form  of  state  interference,  such  as  the  sup- 
port of  public  schools  and  public  fire-departments,  up  to 
complete  public  ownership  of  all  industry.  It  is  well  to 
describe  as  radical  socialists  those  who  would  abolish  private 
property,  and  would  strike  at  the  very  root  of  the  existing 
order  of  society.  The  modern  form  of  radical  socialism  orig- 
inated among  German  thinkers  of  the  school  of  Karl  Marx, 
but  it  has  many  supporters  in  other  lands.  The  typical 
radical  socialist  claims  to  possess  the  only  pure  brand  of 
social  reform,  disdains  any  interest  in  state  socialism,  and 
scoffs  at  state  control  as  mere  temporizing,  as  not  even  a 
single  step  toward  radical  socialism. 

Aim  of  state       The  typical  state  socialist  agrees  that  these  measures  do  not 
socialism       logically  force  him  toward  the  extremer  view.     He  is  at 


TREND  OF  POLICY  553 

heart  an  individualist,  believing  that  the  motive  forces  of 
society  are  in  human  character,  not  in  governmental  ma- 
chinery ;  but  he  seeks  to  prevent  some  kinds  of  competition, 
to  put  other  kinds 'on  a  better  basis ;  "to  make  the  rules  of  the 
game  fairer, ' '  but  not  to  suppress  it.  According  to  this  dif- 
ference in  ultimate  plan,  men  and  present  measures  can  in 
general  be  classified.  Yet  one  view  sometimes  shades  into 
the  other  in  the  life-history  of  a  single  individual.  Believers 
in  moderate  interference  sometimes  move  toward  the  extreme, 
and  the  most  radical  thinkers,  sometimes  with  no  less  honesty, 
become,  with  broadening  experience,  more  and  more  mod- 
erate. It  would  be  surprising  if  any  one  who  is  thinking  and 
growing  in  social  philosophy  should  succeed  in  so  exactly 
adjusting  to  each  other  all  his  opinions,  as  to  be  absolutely 
consistent  at  a  particular  moment  in  his  views  on  social 
policy. 

3.    It  is  not  safe  to  predict  from  present  evidence  a  con-  unripe 
tinned  trend  toward  extreme  social  control.    Social  prophecy  ^j*1 

pnnosopny 

is  fascinating.  Men  like  to  answer  out  of  their  ignorance 
the  question,  Whither  are  we  tending?  A  deeper  study  of 
social  law  should  give  this  power,  but  it  is  not  won  by  hasty 
generalization.  Unripe  social  philosophers  assume  that  be- 
cause the  theory  of  biological  evolution  is  correct,  the  par- 
ticular theory  of  social  evolution  which  they  choose  to  invent 
or  accept  is  unimpeachable.  Radical  socialism  is  the  exag- 
gerated statement  of  a  present  social  need.  It  is  a  bridging 
with  hope,  not  with  experience,  of  the  chasm  between  reality 
and  the  dreams  of  the  unsuccessful. 

It  is  true  that  many  evidences  point  to  an  increase  in  Progress 
social  control  for  some  time  to  come.    The  laws,  the  institu-  %££^ 
tions,  the  prevailing  morality  of  society,  have  not  kept  pace 
with  industrial  growth  in  this  period  of  sweeping  change. 
What  is  seen,  however,  is  a  small  arc  of  the  curve  of  progress. 
Much  of  the  social  regulation  in  the  Middle  Ages  was  similar 
to  that  which  is  now  increasing.     Legislation  by  gilds  and 
privileges  of  private  corporations  hedged  industry  about. 


554     PUBLIC  POLICY  AS   TO  CONTROL  OF  INDUSTRY    [CH.  56 


True  aim 
of  social 
control 


A  reaction  against  this  in  the  seventeenth  and  eighteenth 
centuries  brought  on  national  and  state  control,  and  state 
interference  of  another  kind  rapidly  increased  until  the 
time  of  Adam  Smith.  Then  a  strong  reaction  came,  and 
the  next  period  of  fifty  years  saw  far  less  of  interference. 
The  years  from  1825  to  1840  were  those  of  the  greatest  state 
socialism  ever  seen  in  America,  but  the  results  were  so  un- 
fortunate that  a  violent  reaction  followed.  The  recent  great 
increase  of  state  activity  is  not  likely  to  be  continued  indefi- 
nitely. The  path  of  progress  is  a  spiral.  There  are  forces  al- 
ready at  work  creating  a  resistance  to  any  great  extension  of 
this  movement.  Competition  of  the  healthier  sort  cannot  be 
suppressed  without  paralyzing  results.  Inequality  and  the 
opportunity  for  ability  to  realize  itself  cannot  be  destroyed. 
The  social  regulations  must  be  of  a  sort  to  liberate  the  best 
energies  of  men,  not  to  enchain  them.  If  the  evils  of  state 
regulation  increasingly  appear  to  outweigh  the  benefits,  a 
limit  must  be  put  to  the  movement.  While  social  control  may 
aid  in  lifting  production  and  competition  to  a  higher  and 
more  moral  plane,  the  ability  of  society  will  refuse  to  be  ruled 
H)y  the  standards  of  the  weak  and  inefficient. 


CHAPTER  57 
FUTURE  TREND  OF  VALUES 

§  I.      PAST    AND    PRESENT    OP    ECONOMIC    SOCIETY 

1.     The  meaning  and  scope  of  economics  can  be  better  Definition  of 
seen  at  the  end  than  at  the  beginning  of  its  study.    The  prop-   ^o110111"* 
osition  with  which  this  inquiry  opened  may  well  be  recalled 
in  the  closing  chapter.     The  words  of  the  formal  definition 
of  economics  should  at  this  point  convey  a  fuller  meaning. 
In  the  wide  range  of  subjects  passed  in  review  has  been 
sought  the  answer  to  one  question:  What  determines  and 
affects  the  values  of  good  1 

Perhaps  now  also  can  be  better  appreciated  what  the  in- 
fluence of  such  a  study  might  and  should  be  on  practical 
action.  At  times  economic  students  have  gained  the  ear  of 
statesmen  and  rulers,  and  have  exercised  much  influence  upon 
practical  politics.  It  is  sometimes  bemoaned  that  economists 
have  to-day  so  small  a  direct  part  in  the  government  of  our 
republic.  They  certainly  have  a  greater  part  to-day  than 
they  had  twenty  years  ago,  but  if  they  had  not,  there  would 
be  small  occasion  for  regret.  The  immediate  influence  of  the 
specialist  on  those  in  authority  is  at  most  times  less  in  a 
republic  than  it  is  in  a  monarchy,  at  those  rare  times  when  a 
ruler  shows  the  students  his  favor.  That  influence  in  America 
is  mostly  indirect,  but  it  is  no  less  sure  and  lasting.  The 
results  of  the  earnest  pursuit  of  economic  inquiry  in  the 
universities  and  outside  of  them  are  already  appearing,  not 
in  dramatic  ways,  but  in  the  more  subtle,  surer  form  of  an  in- 
telligent public  opinion. 

555 


Influence  of 
economics 
on  practical 
life 


556 


FUTURE  TREND  OF  VALUES 


[CH.  57 


Examples 
of  mistaken 
social 
prophecy 


Economic 
prophecies 
of  the 
nineteenth 
century 


2.  Economic  science  has  not  reached  a  stage  that  permits 
of  much  prophecy.    Prediction  is  sometimes  given  as  the  test 
of  science.     This  test,  however,  is  one  that  only  astronomy 
can  meet  in  any  remarkable  degree.    Chemistry  can  tell  much 
of  what  will  happen  in  the  laboratory,  but  nothing  of  the 
date  of  future  powder-mill  explosions.    Geology  answers  the 
question  "What?"  with  surmises,  and  "When?"  with  an 
estimate  of  a  few  million  years  more  or  less.    Is  it  surprising 
that  in  human  affairs  still  less  prediction  is  possible  ?    There 
are  countless  unmeasured  factors  in  human  action.     Such 
generalizations  as  are  possible  must  be  based  on  actions  that 
appear  and  reappear  with  practical  constancy.     Though  a 
number  of  facts  unite  to  suggest  some  conclusions  as  to  the 
immediate  future,  the  experience  of  the  last  century  bids  one 
beware  of  sweeping  predictions.     The  close  of  the  French 
Revolution  was  a  period  marked  by  much  speculation  re- 
garding the  future  of  society.    The  optimists,  with  faith  in 
the  perfectability  of  human  nature  and  of  society,  believed 
that  all  social  ills  were  due  to  bad  government;  if  despotism 
were  but  overthrown,  man's  nature  would  develop,  untram- 
meled,  to  perfection.    The  economists  of  that  day  were  scepti- 
cal, because,  looking  deeper,  they  saw  sources  of  misery  in 
the  scantiness  of  man's  environment,  and  in  the  sloth,  igno- 
rance, and  incapacity  of  human  nature.    The  pessimists— the 
communists,  and  socialists  of  that  day — seeing  the  same  evils, 
had  other  explanations  to  offer.    While  the  economists  of  that 
day  believed  the  conditions  of  poverty  and  misery  to  be  in- 
evitable, the  pessimists  pronounced  them  unendurable,  and 
advocated  a  radical  social  change  as  the  only  hope  of  saving 
the  masses  from  starvation.    In  such  a  variety  of  mutually 
contradictory  views  there  must  have  been  much  error,  but 
likewise  much  truth  if  it  could  be  disentangled. 

3.  The  unexpected  changes  in  transportation  and  in  in- 
dustry altered  the  course  of  economic  development  in  the  last 
century.    Much  of  the  economic  theory  of  that  day  appears 
absurd  in  the  light  of  history.    The  inventions  of  the  period, 


§1]  PAST  AND  PRESENT  OF  ECONOMIC  SOCIETY         557 

from  Adam  Smith's  writings  to  Ricardo's  (1776  to  1820), 
were  mostly  for  use  in  manufacturing.  This  suggested  to  the 
minds  of  that  time  the  progressive  cheapening  of  cloth,  iron, 
pottery,  and  of  all  other  products  of  machinery,  but  not  the 
cheapening  of  food.  Indeed,  the  situation  in  western  Europe 
then  suggested  strongly  the  opinion  that  the  products  of  the 
soil  would  steadily  become  more  difficult  to  get.  The  railroad 
was  not  of  practical  importance  until  after  1830 ;  the  steam- 
boat was  not  applied  to  ocean  travel  until  1837.  The  opening 
of  a  rich  continent  and  its  annexation,  by  these  new  agencies, 
to  the  available  resources  of  the  older  countries  were  not 
dreamed  of.  It  was  not  fully  appreciated  that  a  great  change 
in  social  standards,  controlling  the  -growth  of  population, 
was  in  progress.  This  was  the  panorama  of  the  progress  of 
society  as  seen  by  both  the  conservative  economists  and  the 
socialists  of  less  than  a  century  ago:  continued  invention, 
an  increasing  population,  low  wages,  scanty  food,  growing 
wealth  for  the  few,  and  growing  poverty  and  misery  for  the 
masses. 

4.     The  actual  course  of  economic  development  in  the  nine-  unexpected 
teenth  century  falsified  the  predictions  alike  of  optimists,  development 
economists,  and  pessimists.    Not  foreseeing  the  great  supplies  m  the 
of  natural  resources  soon  to  be  made  available  for  the  older   century11* 
countries,  the  men  of  that  day  naturally  thought  of  the  sup- 
ply of  land  as  limited  and  fixed.     Supply  in  the  economic 
sense  means  the  amount  available  at  the  given  time  in  the 
market;  but  despite  the  great  areas  since  brought  into  the 
world-markets,  the  false  idea  of  a  century  ago  still  persists 
in  the  text-books,  and  shapes  economic  reasoning.    It  is  vain 
to  say  that  the  circumstances  have  been  unique  and  that  the 
general  principle  is  still  valid.    Much  of  the  so-called  ortho- 
dox economic  analysis  was  essentially  erroneous  as  applied 
to  the  conditions  of  the  past  century;  it  is  erroneous  to-day 
and  will  be  so  for  years  to  come,  if  it  ever  fits  the  facts.    New 
continents  are  about  to  be  opened.    The  building  of  railroads 
the  length  of  South  America  and  to  the  center  of  Africa  will 


558 


FUTURE  TREND  OF  VALUES 


[CH.  57 


make  available  new  mineral  wealth,  rare  woods,  enormous 
forests,  and  some  of  the  greatest  food-producing  areas  on  the 
globe.  Population  in  Christendom  has  increased  more  rap- 
idly than  ever  before  in  the  history  of  the  world,  but  it  has 
not  overtaken  the  progress  in  resources.  The  rate  of  in- 
crease of  population  is  slackening.  The  result  of  this  com- 
bination of  events  has  been  a  general  rise  of  the  conditions 
making  for  popular  welfare.  Despite  the  problems  and  the 
abuses  that  every  new  change  brings,  the  civilized  world 
undoubtedly  is  more  prosperous  to-day  than  ever  before. 
The  greatest  misery  and  discontent  is  in  the  more  backward 
communities.  This  is  past  and  present ;  what  of  the  economic 
future?  Is  the  present  condition  a  normal  one— is  this  pros- 
perity likely  to  grow  or  to  decline?  Thus  far,  surely,  the 
economic  student  may  question  the  oracles;  for  though  the 
distant  future  is  veiled  from  man  '&  view,  the  role  of  economic 
theory  is  to  show  causal  relations,  to  convert  mystery  into 
reason,  and  thus  to  give  a  lamp  to  the  feet  of  the  present. 


Exhaustion 
of  certain 
natural 
resources 


§  II.      THE  ECONOMIC  FUTURE   OF  SOCIETY 

1.  Present  industrial  progress  is  largely  due  to  material 
conditions,  temporarily  favorable.  Many  of  the  materials 
now  being  destroyed  in  immense  quantities  have  been  slowly 
stored  up  through  the  ages  and  are  not  renewable.1  Till  mod- 
ern times  man  knew  little  of  the  world  beneath  its  crust.  Liv- 
ing, he  scratched  the  earth's  surface,  and  dying,  left  his  bones 
to  fertilize  the  soil.  But  to-day,  man  exhausts  the  stores  in 
the  interior  of  the  earth,  burns  the  treasures  of  the  carbon- 
iferous age,  casts  the  fertilizing  elements  into  the  ocean,  and 
leaves  the  world  an  empty  shell.  Forests  are  being  so  rapidly 
cut  off  that  the  price  of  fuel-wood  and  lumber  in  many  parts 
of  the  United  States  has,  within  twenty  years,  been  multi- 

1  Though  at  first  glance  this  may  seem  contradictory  to  the  statement 
in  the  foregoing  paragraph  regarding  the  nature  of  supply,  it  will  not  be 
found  so  on  closer  examination. 


§ll]  THE  ECONOMIC  FUTURE  OF  SOCIETY  559 

plied  by  three.  The  world's  store  of  iron  ore  is  not  yet  fully 
known,  but  much  of  it  has  been  measured,  and  of  the  deposits 
known  to  be  within  the  United  States  over  one  half  are  said 
to  be  owned  by  one  corporation,  and  they  are  enough  to  con- 
tinue its  present  output  no  more  than  sixty  years.  Many  other 
natural  products  are  in  like  manner  gathered  by  civilized 
man  from  a  stock  created  long  ago.  While  the  supply  of 
vegetable  food  promises  to  be  ample,  the  supply  of  meat  will 
be  maintained  with  difficulty  as  population  becomes  denser. 

2.  Many  other  inexhaustible  sources  of  essential  materials  Possibilities 
have  not  yet  been  developed.  What  has  just  been  said  is  the  J^^)^ 
darker  side.  The  coal-mines  can  be  emptied,  but  so  long  as 
the  sun  shines  and  the  rains  fall,  Niagara  will  remain  as  a 
source  of  light,  heat,  and  power.  The  tides  flow  on  forever. 
In  every  thunder-storm  enough  force  is  dissipated  to  run 
thousands  of  factories.  The  heat  in  the  center  of  the  globe, 
though  not  inexhaustible,  would  suffice  for  man's  needs  for 
many  centuries.  The  force  in  Mount  Pelee,  if  chained  and 
utilized,  would  run  a  million  factories  a  million  years.  It  is 
not  too  much  to  hope  that  engineering  skill  will  some  day 
reach  and  utilize  these  sources.  Such  a  cheapening  and  dif- 
fusion of  power  would  put  a  new  face  on  many  of  the  prob- 
lems of  industry.  New  sources  of  materials  undoubtedly  will 
be  developed.  It  is  reasonable  to  hope  that  before  iron  ore 
has  become  extremely  scarce,  a  cheap  and  practicable  method 
of  extracting  aluminium  from  clay  will  have  been  perfected. 
Secure  of  these  permanent  sources,  civilization  will  stand  on 
a  firmer  foundation. 

A  great  displacement  of  local  values  must  accompany  this  Effect  on 
shifting  of  the  centers  of  power  and  materials.     When  the   g^n°f 
coal  districts  are  heaps  of  slag  and  cinders,  industry  will  be  centers  of 
found  near  the  water-power.    Because  of  distance  from  raw  materials'1 
materials.  New  England  even  now  finds  herself  hard  pushed 
in  her  rivalry  with  the  Southern  states  in  the  manufacture  of 
textiles.     The  industrial  map  of  our  country  will  be  greatly 
altered  a  hundred  years  hence.     The  possession  of  rich  nat- 


560  FUTURE  TJREND  OF  VALUES  [OH.  57 

ural  resources  to-day  does  not  insure  a  community  enduring 

prosperity. 

Effect  of  3.     The  mass  and  quality  of  wealth  will  increase  rapidly 

accumuia-      ^  sociai  and  political  conditions  remain  stable.     The  main 

ting  wealth 

method  of  increasing  wealth  must  be  the  putting  of  energies 
and  resources  into  more  abiding  forms.  In  order  that  a  mo- 
tive for  saving  may  be  present,  there  must  be  stable  condi- 
tions. Increasing  subordination  of  present  to  future  will  be 
accompanied  by  a  fall  in  the  rate  of  interest.  The  growth 
of  wealth  means  a  higher  quality  of  all  artificial  productive 
agents.  A  larger  part  of  the  energies  of  men  will  then  be  di- 
rected merely  to  supervising  the  developed  machinery.  Man 
will  live  in  a  better  environment,  in  a  better  and  richer  world. 
Wages  must  rise  as  the  quality  of  tools  and  machinery  im- 
proves. Population  most  probably  will  not  increase  propor- 
tionately and  the  relation  of  the  labor-supply  to  the  resources 
with  which  it  works  should  be  more  and  more  in  favor  of 
the  laboring  classes.  The  difficult  problems  of  the  concen- 
trated control  of  industry  and  of  the  control  of  wealth  must 
be  solved  in  the  interests  of  all. 

social  prog-  4.  Improvement  of  the  race  biologically,  through  selection 
raceTo  ess  °f  ^e  a^es^  individuals,  has  been  a  great  factor  in  human 
progress.  Social  progress  is  not  necessarily  the  steady  bio- 
logical betterment  of  the  native  ability  of  men.  The  educa- 
tion of  the  average  member  of  society  is  becoming  yearly 
better;  it  is  doubtful  whether  the  innate  capacity  of  a  new- 
born babe  in  Europe  and  America  to-day  is  greater  than  it 
was  among  our  Germanic  ancestors  in  Roman  times.  Indeed, 
the  progress  of  the  past  two  thousand  years  has  been  in  social 
organization,  in  the  enlargement  and  simplifying  of  the  mass 
of  knowledge  which  has  to  be  reappropriated  by  each  new 
individual,  rather  than  in  race-breeding  and  in  quality. 
Nature  vs.  Few  thoughtful  persons  now  hold  the  view  that  the  race 
culture  can  be  rapidly  improved  biologically  by  the  process  of  edu- 
cating the  individual.  Education  is  cumulative  in  so  far  as 
it  builds  up  a  better  environment  into  which  other  children 


§il]  THE  ECONOMIC  FUTURE  OF  SOCIETY  561 

will  be  born,  but  the  betterment  is  not  due  to  the  inheritance 
by  the  child  of  the  acquired  knowledge  and  skill  of  the  par- 
ent. If  this  question  is  open  to  dispute  among  biologists,  it 
is  only  as  regards  a  minute  increment  of  improvement.  Prac- 
tically, selection  is  the  only  means  of  improving  the  innate 
capacity  of  any  species  in  any  large  measure.  Many  forces 
were  at  work  in  the  past  to  lift  man  above  the  brute,  and 
especially  to  increase  the  average  brain-power  of  the  human 
race.  The  weak,  the  ignorant,  the  incapable  in  primitive 
societies  were  ruthlessly  killed  off.  The  strong,  the  sagacious, 
and  the  enterprising  left  the  largest  numbers  of  descendants. 

5.  Progress  will  be  checked  if  the  native  quality  of  the  Decrease  of 
race  declines.  Under  modern  conditions,  especially  within 
the  last  quarter  of  a  century,  the  successful  elements  of  soci- 
ety are  becoming  less  fertile.  Large  families  were  the  rule 
among  the  capable  pioneers  of  America;  now  they  are  rare 
except  in  the  lower  industrial  ranks.  Democracy  and  oppor- 
tunity are  favoring  this  process  of  increasing  the  mediocre 
and  reducing  the  excellent  strains  of  stock.  Caste  and  status 
kept  successful  generations  of  capable  men  in  humble  social 
ranks  from  which  only  by  chance  some  remarkable  individual 
could  rise.  (In  a  democracy,  those  of  marked  ability  can  more 
easily  move  into  the  better-paid  callings  and  professions!} 
This  individual  good  fortune,  however,  reduces  the  probabil- 
ity of  offspring.  In  the  higher  social  ranks  are  more  bach- 
elors and  old  maids  than  in  the  lower  ranks,  and  fewer 
children  are  born  to  each  marriage.  The  president  of  our 
oldest  university  has  shown  that  one  fourth  of  the  graduates 
of  the  last  generation  have  remained  single,  and  that  the  av- 
erage number  of  children  of  the  married  graduate  is  two. 
That  group  of  men,  therefore,  has  left  only  three  fourths 
enough  descendants  to  maintain  its  numbers,  and  as  the  pop- 
ulation has  doubled  within  the  same  generation,  that  class 
represents  only  three  eighths  as  large  a  proportion  of  the 
American  stock  as  formerly. 

This  sterilization  of  ability  has  cumulative  results.    If  so- 


562 


FUTURE  TREND  OF  VALUES 


[CH.  57 


The  menace 
to  progress 


Sympathy 
and  selfish- 
ness in 
relation  to 
progress 


Status 

endangering 

progress 


ciety  were  composed  in  equal  parts  of  two  distinct  strains  of 
stock,  not  intermarrying;  if  the  total  population  kept  intact 
from  one  generation  to  another  (say  each  period  of  thirty 
years),  but  the  superior  strain  contributed  only  three  fourths 
of  its  own  number,  at  the  end  of  five  generations  it  would 
have  sunk  from  one  half  to  a  little  more  than  one  eighth  of 
the  population.  A  period  brief  in  the  life  of  nations  would 
serve  to  leave  it  an  almost  negligible  factor  in  social  life. 
There  can  hardly  be  a  doubt  that  at  present  our  society  is 
on  the  average  increasing  far  more  from  the  less  provident, 
less  enterprising,  less  intelligent  classes.  There  has  not  yet 
been  time  for  many  of  the  cumulative  effects  of  this  process 
to  appear.  Progress  is  threatened  unless  social  institutions 
can  be  so  adjusted  as  to  reverse  the  present  process  of  multi- 
plying the  poorest,  and  of  extinguishing  the  most  capable 
families. 

6.  //  progress  is  to  continue,  there  must  be  left  a  wide 
field  for  the  ambitions  and  for  the  competition  of  individuals. 
The  results  of  any  given  ability  are  dependent  upon  the  en- 
ergy with  which  it  is  used.  The  social  machinery  finds  its 
motive  force  in  the  nature  of  men.  In  taking  economic  wants 
as  the  starting  point  of  our  study,  it  was  not  implied  that 
men  were  entirely  selfish.  Sympathy  widens;  economic 
wants  include  family,  friends,  and,  in  a  growing  measure, 
humanity.  The  happiness  of  a  truly  socialized  man  consists 
in  part  in  the  happiness  of  his  fellows.  As  social  sympathy 
broadens,  the  sense  of  duty  becomes  a  stronger  economic 
force.  Men  change,  but  not  rapidly,  and  not  always  for  the 
better.  It  is  unsafe  to  overestimate  the  generosity  of  men. 
Individual  wants  and  interests  must,  so  far  as  can  now  be 
seen,  continue  to  be  among  the  stronger  forces  that  move 
society.  Progress  is  made  because  to  exceptional  ability  in 
general  is  now  presented  the  hope  of  large  rewards. 

These  dynamic  forces  making  for  progress  are  at  present, 
however,  threatened  from  two  sides.  Enterprise  is  threat- 
ened from  the  side  of  privilege  or  status.  The  avoidance  of 


§11]  THE    ECONOMIC  FUTURE  OF   SOCIETY  563 

certain  kinds  of  work  which,  by  social  convention,  come  to  be 
regarded  as  degrading,  takes  much  ability  out  of  business. 
The  freedom  of  America  to  so  great  a  degree  from  this  dis- 
dain of  honest  labor  has  been  a  large  factor  in  her  progress, 
but  it  is  endangered  when  men  become  timidly  conservative 
of  social  position.  Progress  is  threatened,  secondly,  by  democ-i  Envy 
racy,  with  its  tendency  to  carry  the  notion  of  literal  equal 
over  into  industry.  When  democracy  becomes  envious 
denies  to  exceptional  ability  an  exceptional  reward.  The  line 
of  growth  must  be  the  resultant  of  the  positive  forces  in  these 
two  principles.  The  energy  of  the  social  reformer  must  be 
directed  along  rational  lines.  If  this  can  be  done,  the  eco- 
nomic outlook  is  for  a  great  development  of  wealth  and  pop- 
ular welfare.  Economics  must  be  looked  upon  as  the  study 
of  the  forces  in  human  nature  as  much  as  of  the  material 
resources  of  the  world. 


oc-i 
lity! 
,  it\ 


QUESTIONS  AND  CRITICAL  NOTES 


QUESTIONS  AND   CRITICAL  NOTES 

THE  QUESTIONS.— These  questions  are  not  intended  to  be  used  merely 
as  tests  of  knowledge  of  the  text.  They  leave  untouched  many  of  the 
most  important  questions  in  the  reading,  and  they  raise  other  in- 
quiries hardly  hinted  at  in  it.  The  list  began  ten  years  ago  with 
one  or  two  questions  on  each  topic,  assigned  in  advance  of  lectures 
and  recitations,  with  the  object  of  arousing  the  student's  thought, 
quickening  his  observation,  and  stimulating  his  interest  in  the  sub- 
jects. The  possibilities  of  helpful  questions  of  this  kind  are  hardly 
more  than  suggested  by  the  examples  gi^en,  and  every  teacher  will 
find  peculiar  opportunities  in  his  own  neighborhood  for  other  similar 
inquiries. 

Other  questions  are  more  of  the  nature  of  those  in  Problems  in  Po- 
litical Economy,  by  W.  G.  Sumner  (published  by  Holt  &  Co.,  New  York, 
1884),  which  are  intended  to  be  reasoned  out  in  the  light  of  princi- 
ples given  in  the  class-room.  Many  teachers  and  students  have  found 
much  help  in  that  little  book,  which  in  turn  acknowledges  large  obli- 
gations to  earlier  lists  of  questions.  The  changed  point  of  view  in 
economic  theory  has,  however,  made  most  of  the  older  problems  of 
this  nature  unusable  except  after  reformulation.  Fertile  in  sugges- 
tions of  both  of  the  kinds  of  questions  mentioned  are  two  books  by 
H.  J.  Davenport,  Outlines  of  Economic  Theory  and  Outlines  of  Ele- 
mentary Economics  (The  Macmillan  Co.,  New  York,  1896  and  1897), 
though  some  of  the  questions  imply  theoretical  views  differing  from 
those  of  this  book.  Excellent  lists  of  questions  with  references  to 
reading  have  been  prepared  by  W.  G.  L.  Taylor,  in  his  Exercises 
in  Economics  (The  University  Publishing  Co.,  Lincoln,  Neb.,  1900). 
The  list  of  problems  of  this  kind  can  easily  be  extended  to  meet  the 
special  conditions  of  each  community. 

THE  BIBLIOGRAPHICAL  NOTES.— The  few  references  and  critical  notes 
given  are  intended  as  a  help  to  teachers  and  advanced  students  de- 
sirous of  following  some  of  the  more  recent  contributions  to  contro- 
verted points  in  economic  theory.  No  attempt  has  been  made  to  fur- 
nish a  list  of  books  for  the  beginner  or  the  regular  reader.  Among 

567 


568  QUESTIONS  AND  CRITICAL  NOTES 

accessible  books  containing  helpful  lists  of  that  kind  may  be  men- 
tioned : 

The  Reader's  Guide  in  Economic,  Social,  and  Political  Science,  by 
Bowker  and  lies. 

Outlines  of  Economics,  by  B.  T.  Ely  (published  by  Macmillan,  New 
York,  2d  ed.,  1900).  Contains  both  questions  and  bibliographies. 

Introduction  to  the  Study  of  Economics,  by  C.  J.  Bullock  (published 
by  Silver,  Burdett  &  Co.,  2d  ed.,  1900).  The  references  to  the  liter- 
ature are  given  by  pages  or  sections  at  the  end  of  each  chapter,  and 
at  the  back  is  a  list  (about  twenty  pages)  of  the  most  useful  texts, 
documents,  and  materials. 

Financial  History  of  the  United  States,  by  D.  B.  Dewey  (published 
by  Longmans,  Green  &  Co.,  1903).  Contains  excellent  references  on 
public  finances,  tariff,  banking,  and  taxation  of  the  United  States. 

Introduction  to  Economics,  by  H.  B.  Seager  (published  by  Holt  & 
Co.,  New  York,  1903).  Each  of  the  first  twenty-six  chapters  is  fol- 
lowed by  fresh  and  well-selected  references  varying  from  one  line  to 
nearly  a  page  in  length.  A  good  general  bibliographical  note  is 
given  on  pp.  61-2. 

CHAPTER  1.     THE  NATURE  AND  PURPOSE  OF  POLITICAL  ECONOMY 

1.  Has  political  economy  anything  to  do  with  woman  suffrage,  the 
liquor  problem,  a  republican  vs.  a  monarchical  form  of  government, 
the  silver  question? 

2.  Is  political  economy  a  study  of  things  or  of  men? 

3.  Shall   a   piece   of    coal   be   studied   in   geology,    botany,    physics, 
chemistry,  or  economics? 

4.  Do  you  expect  to  acquire  wealth  more  easily  as  a  result  of  the 
study  of  political  economy? 

5.  Of  what  practical  use  do  you  think  political  economy  is? 

6.  Is  political  economy  necessary  to  the  understanding  of  the  busi- 
ness world,  or  vice  versa? 

7.  How  wide  a  knowledge  would  a  complete  understanding  of  in- 
dustrial society  require? 

8.  Did  the  discovery  of  America  make  the  study  of  political  econ- 
omy more  important? 

CHAPTER  2.     THE  ECONOMIC  MOTIVES 

1.  If  you  found  $10  to-day  on  the  street,  what  would  you  do 
with  it? 

2.  What  would  be  the  chief  differences  between  your  use  of  it  now 
and  at  the  age  of  five  or  the  age  of  twelve? 


QUESTIONS  AND  CRITICAL  NOTES  569 

3.  Name  Crusoe's  wants  in  the  order  of  their  importance. 

4.  Is  it  well  to  be  contented  with  your  lot?     Is  it  well  to  be  dis- 
contented? 

5.  Why  does  a  horse  like  hay  and  a  man  prefer  meat? 

6.  Are  the  wants  of  a  savage  more  easily  satisfied  than  those  of 
civilized  men?     Why? 

7.  How  many  motives  led  you  to  come  to  college? 

8.  If  you  ever  worked  for  wages,  or  a  salary,  was  that  the  only 
motive?     What  else? 

9.  James  Bryce  says  that  the  incomes  of  American  university  pro- 
fessors are  much  less  than  those  of  men  of  corresponding  ability  in 
law  and  medicine.     If  true,  why? 

10.  If  you  could,  would  you  do  nothing  always?    Why? 

11.  Which  would  you  prefer,  to  clerk  in  a  store  at  $1.50  a  day,  or 
to  lay  masonry  at  $2?     Why? 

12.  Do  men  work  better  under  threat   or  when  their  pride  is   ap- 
pealed to? 

13.  Is  pride  as  powerful  a  motive  as  greed,  in  economic  action? 

14.  Do  you  know  any  persons  that  work  from  a  sense  of  duty  alone? 

15.  Are  charity  workers  usually  well  paid?     Why? 

CHAPTER  3.    WEALTH  AND  WELFARE 

1.  What  is  it  to  be  economical  of  money? 

2.  Why  did  Crusoe  work  at  all? 

3.  When  he  began  to  work  at   one  thing,  why  did  he  ever  stop 
to  work  at  another? 

4.  What  is  the  difference  in  utility  between  the  water  in  a  solid 
mountain  reservoir  and  the  same  water  when  it  is  flooding  the  valley? 

5.  Does  it  change  the  utility  of  a  load  of  powder  to  touch  a  match 
to  it? 

6.  Is  water  useful?    Is  dynamite? 

7.  Is  the  last  bait  worth  more  when  the  fish  are  biting  well? 

8.  Are  the  following  wealth:  food,  tobacco,  medicine,  whisky,  good 
looks,  good  health,  a  wooden  leg? 

9.  Is  a  book  full  of  useful  information,  wealth?    Is  a  head  full  of 
useful  knowledge,  wealth? 

10.  Is  a  ship  at  the  bottom  of  the  ocean,  or  gold  in  the  mine,  wealth? 

11.  Is  well-being  in  proportion  to  wealth?     Why? 

12.  Are  services,  music,  a  theatrical  performance,  a  gambler's  pack 
of  cards,  wealth? 

NOTE. — The  theory  of  marginal  utility  broadly  outlined  in  chapters 
3-5  has  been  worked  out  in  detail  by  the  group  of  writers  called 


570  QUESTIONS  AND  CRITICAL  NOTES 

the  Austrian  economists.  The  mechanism,  or  the  technique,  of  mar- 
ginal utility  and  exchange  as  they  conceive  of  it,  is  essentially  what 
this  text  seeks  to  explain.  Our  application  and  development  of  the 
conception  of  marginal  utility  differs  from  theirs,  however,  in  ways 
that  will  appear  as  the  text  advances. 

For  more  detailed  discussion  of  many  points  in  chapter  3,  see  Smart, 
Introduction  to  the  Theory  of  Value,  pp.  9-17;  Wieser,  Natural  Value, 
pp.  3-16;  Bohm-Bawerk,  Positive  Theory  of  Capital,  pp.  129-153. 

CHAPTER  4.  THE  NATURE  OF  DEMAND 

1.  Give  illustrations  of  the  difference  between  desire  and  demand. 

2.  Do  people  actually  expend  their  incomes  so  as  to  get  the  maximum 
utility  judged  by  a  standard  they  would  admit  to  be  morally  sound? 

3.  What  causes  a  demand  for  an  additional  supply  of  food?     Of 
books  ? 

4.  If  you  never  eat  corn-bread,  will   the    failure    of   the   corn-crop 
affect  your  grocery  bill? 

5.  Give   examples   you   have   seen   of   a   higher   price   of   one   thing 
causing  an  increasing  use  of  another. 

6.  Do  you  buy  what  you  most  desire? 

7.  Give  examples  of  cases  where  supply  is  fixed,  and  demand  varies. 

8.  Give  examples  of  demand  shifting  from  one  product  to  another. 

NOTE.— For  a  more  detailed  discussion  see  works  cited:  Smart, 
18-33;  Bohm-Bawerk,  159-169;  Wieser,  16-36. 

CHAPTER  5.    EXCHANGE  IN  A  MARKET 

1.  Are  merchants  producers  of  wealth,  or  are  their  profits  merely 
subtracted  from  the  wealth  already  produced? 

2.  Is  the  railroad  productive?     Why? 

3.  Give  examples  within  your  observation  of  improved  productive 
processes  increasing  exchange;  of  the  reverse. 

4.  Why  is  exchange  profitable  if  it  is  fair? 

5.  Would  doubling  all  commodities  affect  their  exchange  value? 

6.  Is  part  of  a  stock  of  goods  ever  worth  more  than  the  whole? 
Examples. 

7.  Do  you  ever  take  account  of  a  difference  of  five  cents  in  de- 
ciding whether  to  purchase? 

8.  Is  barter  more  or  less  frequent  now  in  America  than  formerly? 
In  the  world? 

9.  Is  there  any  causal  relationship  between  commerce   and  manu- 
factures?    If  so,  in  what  way? 

10.  In  a  time  of  high  excitement  gold  ~  was  sold  for  more  at  one 
side  of  the  room  than  at  the  other  side;  how  account  for  this? 


QUESTIONS  AND  CRITICAL  NOTES  571 

11.  Give    examples    of,    and    reasons    for,    two    prices    in    the    same 
market. 

12.  What   effect   on   prices   should   be   expected   from   an   invention 
that  makes  possible  the  carrying  of  fresh  meat  from  South  America 
to  England? 

13.  Describe  the   method   of   selling   any  product  you  know   about. 
What  is  the  market  in  which  it  is  sold? 

NOTE.— See  works  cited:  Smart,  pp.  40-63;  Bohm-Bawerk,  193-222; 
Wieser,  39-53. 

CHAPTER  6.     PSYCHIC  INCOME 

1.  Is    it    possible    to    compare    the    value    of    the    portrait-painter's 
service  with  that  of  the  gardener? 

2.  To  call  the  teacher's  work  unproductive,  and  the  ditch-digger's 
work  productive  was   once  usual,   but  is  so   no   longer ;    give  reasons 
for  either  view. 

3.  It  is  usual  to  call  the  use  of  a  house  for  business  purposes  a 
productive  use,  but  its  use  as  a  residence  an  unproductive  one.     What 
reasons  are  there  for  and  against  this? 

4.  Give  a  list  of  material  agents  that  are  yielding  non-material  uses. 

5.  Give   examples   of   personal   services   that    are   most   immediately 
expressed  as  gratifications. 

NOTE.— The  phrase  "psychic  income,"  used  here  for  the  first  time, 
expresses  a  conception  long  neglected,  but  essential  to  the  advance- 
ment of  psychological  economics.  The  idea  has  been  recognized  in 
the  writings  of  Edwin  Cannan,  Irving  Fisher,  W.  M.  Daniels,  and  per- 
haps of  late  by  others.  It  was  discussed  by  the  author  in  the  Quarterly 
Journal  of  Economics,  Vol.  XV,  pp.  19-30,  especially  pp.  25-26,  in  an 
article  called  "Recent  Discussion  of  the  Capital  Concept"  (November, 
1900). 

CHAPTER  7.     WEALTH  AND  ITS  INDIRECT  USES 

1.  Give  reasons  for  attributing  exchange  value  to  the  waves  of  the 
ocean;  to  a  waterfall,  a  water-wheel,  a  loom,  a  piece  of  cloth,  a  dress 
made  of  the  cloth. 

2.  Show  the  connection  between  these  things. 

3.  How  can  the  use  of  a  flock  of  sheep  be  of  value  to  one  who 
must  return  them  all  to  the  owner? 

4.  Why  should  the  use  of  a  machine  that  never  can  be  a  direct  cause 
of  gratification,  have  a  value  that  men  will  pay  for? 

5.  Give  examples  of  wealth  never  becoming  a  direct  cause  of  grati- 
fication, yet  whose  possession  is  greatly  valued. 


572  QUESTIONS  AND  CRITICAL  NOTES 

NOTE.— The  conception  in  this  chapter  was  ably  presented  by 
Bohm-Bawerk  in  Capital  and  Interest,  Bk.  Ill,  ch.  v,  pp.  219-227. 
He  does  not,  however,  make  use  of  it  in  a  theory  of  rent. 

CHAPTER  8.     THE  EENTING  CONTRACT 

1.  What  things  beside  land  are  rented? 

2.  What   is   the   form   of   contract   used   in  the   renting   of   farms, 
business  buildings,  and  residences,  in  the  community  where  you  live? 

3.  Does  the  rent  of  pianos,  type-writers,  or  masquerade-suits  depend 
on  the  value  of  the  thing  rented?     Is  the  rental  a  moderate  return  on 
the  investment? 

4.  What  are  the  difficulties  in  determining  tenants7  improvements? 

NOTE. — Various  writers  have  recognized  that  social,  class  distinc- 
tions had  an  influence  on  the  conceptions  of  rent  and  capital  in 
England  in  the  eighteenth  century;  see  Fetter,  article  on  "The  Next 
Decade  of  Economic  Theory, ' '  in  American  Economic  Association, 
3d  ser.,  Vol.  Ill,  pp.  236-246,  especially  243-4;  also  A.  S.  Johnson, 
Rent  in  Modern  Economic  Theory,  p.  19,  and  references  there  given. 
Heretofore,  however,  there  has  not  been  assigned  to  the  form  of  the 
contract  the  significance  here  given  it.  A  discussion  of  the  points 
at  issue  will  be  found  in  The  Relations  between  Rent  and  Interest, 
by  F.  A.  Fetter  and  others  (published  by  Macmillan,  New  York,  1904), 
pp.  8-10,  on  the  renting  contract. 

CHAPTER  9.     THE  LAW  OF  DIMINISHING  RETURNS 

1.  Is  it  possible  to  do  twice  the  amount  of  business  in  any  store- 
room by  doubling  the  stock  and  the  force  of  clerks? 

2.  Is  it  possible  to  expand  a  university  indefinitely  by  increasing 
the  force  of  teachers  and  the  equipment,  without  enlarging  the  build- 
ings? 

3.  Why  do  men  cultivate  two   acres  instead   of  one?     Where  land 
is  plentiful,  why  do  not  men  cultivate  two  acres  instead  of  one? 

4.  Are  there  any  things,  not  free  goods,  that  could  be  indefinitely 
increased  without  increasing  difficulty? 

5.  English    farmers    raise    thirty-five    bushels    of    wheat    per    acre, 
Americans  perhaps  fifteen;  why  this  difference? 

6.  Why  did  people  go  to  Dakota  and  Iowa  when  there  was  still  room 
in  New  England? 

7.  Why  put  up  a  twenty-story  building?     Why  not  build  a  fifty- 
story  one? 

NOTE.— The  broad  reading  here  given  to  the  law  of  diminishing 
returns  is  so  recent  that  even  the  latest  texts  have  recognized  it  only 
in  a  partial  manner,  defining  "the  law"  in  the  old  terms  confined  to 
land.  For  the  old  statement  see  J.  S.  Mill,  Principles  of  Political 
Economy  (1846),  Bk.  I,  ch.  xn.  Writers  even  so  advanced  as 


QUESTIONS  AND   CRITICAL  NOTES  573 

Alfred  Marshall  follow  Mill  with  no  essential  modification.  For  a 
good  historical  account  of  the  doctrine  see  Edwin  Cannan,  History 
of  the  Theories  of  Production  and  Distribution,  pp.  147-182  (1893;  2d 
ed.,  with  additions,  1903),  which  advances  no  positive  theory,  but  makes 
evident  many  inconsistencies  in  the  older  view.  A  keen  analysis  and 
important  contribution  to  economic  thought  was  made  by  J.  R.  Com- 
mons, Distribution  of  Wealth,  pp.  116-159  (1895).  John  B.  Clark, 
in  various  earlier  articles,  and  in  his  Distribution  of  Wealth  (1900), 
has  done  more  than  any  one  else  to  develop  the  conception  of  "a  uni- 
versal law  of  economic  variation. ' '  In  magazine  articles  by  various 
writers,  the  same  idea  has  been  developed,  but  no  thorough-going  ap- 
plication of  it  has  been  made  in  the  available  text-books. 

CHAPTER  10.     THE  THEORY  OP  RENT 

1.  Is  competition  severe  in  the  renting  of  land  in  your  community? 

2.  Give  examples  you  have  seen  of  a  rise  of  rent;   the  cause.     Of 
a  fall  of  rent;  the  cause. 

3.  Does   the   existence    of   the   land   of    California   have    any   effect 
on  rents  in  New  York  city?     On  agricultural  rents  in  New  York  state? 

4.  If  all  the  land  on  an  island  were  equally  fertile  and  equally  con- 
venient of  access,  would  any  of  it  pay  a  rent? 

5.  If  you  owned  the  Golden  Gate,  or  the  harbor  of  New  York,  could 
you  rent  it? 

6.  How  does  the  hire  of  a  team  of  horses  resemble  the  rent  of  land? 

7.  How  do  livery  charges  in  a  college  town  in  commencement  week 
illustrate  the  subject  of  .rent? 

8.  Show   how   a    change    of    circumstances   may   raise   the   rent    of 
machinery. 

NOTE.— Although  most  texts  still  present  the  older,  narrow  concep- 
tion of  land  rent,  its  defects  have  been  revealed  by  many  critics. 
J.  B.  Clark  has  been  the  chief  champion  of  the  broader  conception; 
American  Economic  Association,  1st  ser.,  Vol.  Ill,  No.  2,  Capital  and 
Its  Earnings  (1888);  and  Distribution  of  Wealth,  ch.  ix  and  ch.  xni. 
See  our  summary  of  the  present  situation,  American  Economic  Asso- 
ciation, 3d  ser.,  Vol.  II,  p.  241  (1900).  Alfred  Marshall's  effort  to 
save  the  older  conception  by  compromise  on  a  "quasi-rent"  doctrine 
has  many  supporters,  but  this  doctrine  is  examined  in  detail  and 
criticized  adversely  by  the  writer  in  an  article  entitled  ' '  The  Passing 
of  the  Old  Rent  Concept,"  Quarterly  Journal  of  Economics,  Vol.  XV, 
pp.  416-455  (1901).  For  both  negative  and  positive  reasons  for  a 
change  in  the  concept,  see  The  delations  between  Eent  and  Interest , 
before  cited  (in  note  to  ch.  8). 

CHAPTER  11.     REPAIR,  DEPRECIATION,  AND  DESTRUCTION  OF  WEALTH 

1.  What  is  the  difficulty  in  the  definition:  Rent  is  the  payment  for 
the  original  and  indestructible  powers  of  the  soil? 


574  QUESTIONS  AND  CRITICAL  NOTES 

2.  If  the  value  of  improvements  on  land  is  all  counted,  is  there  any- 
thing over?    Examples. 

3.  What  is  stumpage?    Does  it  differ  from  rent? 

4.  What  do  you  know  about  the  methods  of  renting  mines? 

5.  What  methods  are  adopted  to  keep  up  the  efficiency  of  factories? 

NOTE.— Compare  and  note  the  inconsistent  use  of  the  term  "rent"  by 
Eicardo,  pp.  34-5  and  45-6,  McCulloch's  edition.  See  also  article, 
* '  Depreciation, ' '  in  Palgrave  's  Dictionary. 

CHAPTER  12.     INCREASE  OF  RENT-BEARERS  AND  OF  RENTS 

1.  What  are  the  most  obvious  ways  of  increasing  the  productiveness 
of  land? 

2.  How  does  a  new  railroad  affect  the  value  of  the  land  it  passes 
through  ? 

3.  How  would  the  rent  of  a  rocky  island  be  affected  if  it  became  a 
summer  resort? 

4.  Mention   any   cases   you   may   have   seen   where    a   greater   value 
was  imparted  to  land  by  a  newly  discovered  use. 

5.  A  tunnel  was  made  to  drain  a  mine;  the  stock  doubled  in  price. 
Was  it  really  the  stock,  the  old  mine,  or  the  new  hole  in  the  moun- 
tain-side that  had  increased  in  value? 

6.  Criticize   the   statement   that,    in   an    economic   sense,    land   is    a 
" fixed  stock  for  all  time." 

NOTE.— The  changes  which  the  rent  concept  is  undergoing  can  be 
traced  in  the  work  of  Alfred  Marshall.  See  Principles  of  Eco- 
nomics, Bk.  V,  ch.  ix  on  "Quasi-rent,"  and  ch.  x  on  "Situation 
Rent,"  and  Bk.  VI,  ch.  ix,  Sees.  6-7,  in  which  Marshall  modifies  the 
older  conception  of  rent.  This  is  discussed  in  "The  Passing  of  the 
Old  Rent  Concept,"  cited  above  (in  note  to  ch.  10). 


CHAPTER  13.     MONEY  AS  A  TOOL  IN  EXCHANGE 

1.  Why  do  you  value  money?    Do  you  value  it  more  than  the  things 
it  buys? 

2.  What  functions  does  money  perform  in  society? 

3.  Could  a  country  better  do  without  money,  horses,  or  roads? 

4.  If  money  is  a  tool,  what  does  it  make? 

5.  What  is  the  difficulty  in  deciding  whether  to  call  the  following 
money:  gold  ingots,  gold  coin,  silver  dollars,  copper  cents,  greenbacks, 
bank-checks,  chalk-marks  to  keep  account? 

6.  Are  men  wealthy  in  proportion  to  the  money  they  have?     Are 
countries  ? 

7.  Would  a  nation  be  poorer  if,  like  Sparta,  it  prohibited  all  money? 


QUESTIONS  AND  CRITICAL  NOTES  575 

CHAPTER  14.     THE  MONEY  ECONOMY  AND  THE  CONCEPT  OF  CAPITAL 

1.  Are  national  bonds  or  promissory  notes,  wealth? 

2.  Is  it  money  or  things  that  the  borrower  wants? 

3.  If  you  were  starting  a   factory   on   credit,   would  you  rent  the 
machines  or  buy  them  with  borrowed  money?     Why? 

4.  When  a  man  says  he  has  a  certain  capital  invested  in  his  busi- 
ness, does  he  mean  to  include  the  value  of  the  land  and  buildings? 

5.  What  is  the  meaning  of  the  phrase,  ' '  a  capitalistic  age ' '  ? 

NOTE.— We  are  indebted  to  the  economic  historians  for  a  better 
understanding  of  the  important  influence  money  has  had  on  economic 
organization.  See  Hildebrand  's  notable  article  in  the  first  number  of 
the  Jahrbucher,  and  Ashley,  English  Economic  History.  J.  B. 
Clark  was  the  first  among  contemporary  economists  to  emphasize  the 
value  concept  of  capital.  The  scholarly  and  judicial  article  by  Irving 
Fisher  on  "Precedents  for  Defining  Capital"  in  Quarterly  Journal 
of  Economics,  May,  1904,  makes  possible  better  understanding  and 
agreement  on  the  subject.  I  am  pleased  to  say  that  in  this  article, 
and  in  personal  correspondence,  Professor  Fisher  disavows  the  inter- 
pretation I  had  thought  (see  "Recent  Discussion,"  etc.)  that  his 
words  required.  His  conception  of  capital  is  thus,  in  essentials,  the 
one  here  employed,  differing  from  it  not  in  thought,  but  merely  in 
terminology.  Professor  Fisher's  original  studies  of  the  capital  con- 
cept, in  the  Economic  Journal  in  1896-7,  are  indispensable  to  an  un- 
derstanding of  the  development  of  this  important  phase  of  the  new 
economic  theory.  The  connection  between  the  conclusions  of  eco- 
nomic history  and  the  value  concept  of  capital  in  economic  theory 
has  been  made  by  the  author  in  essays  before  cited  under  chapters 
6  and  8:  "Recent  Discussion  of  the  Capital  Concept";  "The  Next 
Decade  of  Economic  Theory,"  and  "The  Relations  between  Rent  and 
Interest. ' ' 

CHAPTER  15.     THE  CAPITALIZATION  OF  ALL  FORMS  OF  RENT 

1.  What  relation  is  there  between  the  rate  of  interest  and  the  price 
of  land  bearing  a  given  rental? 

2.  If  a  $100  share  of  railroad  stock  sells  at  par  when  interest  on 
loans  is   at   5%,  what  will  be  its   price   when  interest   rises  to   6%  ? 
When  interest  falls  to  4%1 

3.  If  a  business  is  very  successful  and  its  dividends  double,  what 
will  be  the  effect  on  the  selling  price  of  its  stock? 

NOTE. — The  subject  is  almost  foreign  to  the  standard  works  on 
economics,  which  have  continued  to  look  upon  capital  as  primary, 
and  its  income  as  derived.  Numerous  recent  articles  will  be  found, 
however,  dealing  with  concrete  problems  where  the  logical  and  the 
practical  views  are  seen  to  be  the  same;  e.g.,  W.  Z.  Ripley,  Quarterly 
Journal  of  Economics,  Vol.  XV,  p.  106  (1900),  article  on  "The  Capital- 
ization of  Public  Service  Corporations ' ' ;  also  article  in  Engineering 
News,  Vol.  XXVIII,  p.  492  (November,  1892). 


576  QUESTIONS  AND  CRITICAL  NOTES 

CHAPTER  16.    INTEREST  ON  MONEY  LOANS 

1.  Some  money-lenders  in  cities  get  10.%"  a  day  from  fruit-vendors 
for  the   advance   of   small   sums   of   money,   and   the   losses   are   very 
slight.     Pawnbroking  pays  frequently  25  to  100%  per  year.     In  these 
cases  what  affects  the  rate  of  interest? 

2.  Through  what  agency  does  the  Western  farmer  borrow  Eastern 
capital? 

3.  How  do  Englishmen  invest  in  American  railroads? 

4.  In  what  ways  can  a  lender  collect  a  high  rate  of  interest  with- 
out appearing  to  do  so? 

5.  What  would  be  the  effect  upon  the  rate  of  interest  in  a  new  state 
if  it  passed  a  law  preventing  the  collection  of  loans  by  outside  lenders? 

6.  Why  has  interest  been  about  10%in  the  West,  1%  in  the  Central 
States,  5%  in  New  York,  4% in  Germany? 

7.  What   is   the  money  market?     Who   are   the   buyers   and  sellers, 
and  what  do  they  buy  and  sell? 

8.  In  a  panic,  interest  rises  on  short  loans  and  prices  fall,   while 
it   is   almost   impossible   to   borrow   money;    does   this   show   that   the 
amount  of  money  determines  the  interest  rate? 

9.  When  gold  is  leaving  England,  the  bank  raises  the  rate  of  dis- 
count (interest)  ;  does  this  show  that  the  quantity  of  money  determines 
the  rate  of  interest? 

CHAPTER  17.    THE  THEORY  OF  TIME-VALUE 

1.  Give  examples  of  a  high  cost  for  the  use  of  wealth  without  the 
borrowing  of  money. 

2.  Give  some  examples  of  the  neglect   of  repairs  through   lack  of 
resources,  and  show  how  it  involved  time-value. 

3.  What  would  be  some  of  the  first  effects  on  production  if  interest 
on  money  loans  fell  to  one  half  its  present  rate? 

4.  Which  is  the  more  important  for  the  rate  of  interest,  the  amount 
of  money  in  the  banks  or  the  amount  of  goods  in  the  country? 

5.  How  would  the   rate   of  interest  be   affected   if  the   amount   of 
money  were  doubled  at  once? 

NOTE.— In  an  interesting  article  on  " Prestige  Value,"  by  L.  M. 
Keasbey,  in  Quarterly  Journal  of  Economics,  May,  1903,  has  been 
developed  one  phase  of  the  thought  in  Sec.  II,  proposition  2. 

The  very  active  recent  discussion  of  "the  interest  problem"  has 
done  much  to  clarify  economic  theory;  but  almost  the  entire  recent 
literature  of  the  subject  (as  seen  from  our  point  of  view)  is  based 
on  a  defective  concept  of  capital.  See  in  Quarterly  Journal  of  Eco- 
nomics, Vol.  XVII,  pp.  163-180  (November,  1902),  article  entitled  "The 
'Roundabout  Process'  in  the  Interest  Theory,"  the  author's  criticism 


QUESTIONS  AND  CRITICAL  NOTES  577 

of  Bohm-Bawerk 's  Positive  Theory.  All  the  recent  "marginal  pro- 
ductivity" interest  theories  are  at  fault,  we  venture  to  say,  in  try- 
ing to  derive  income  from  capital  instead  of  deriving  the  amount 
of  capital  from  rent. 

CHAPTER  18.    EELATIVELY  FIXED  AND  RELATIVELY  INCREASABLE  FORMS 

OF  CAPITAL 

1.  Why  not  raise  seals  in  California  and  fruit  in  Alaska? 

2.  Has  the  rainfall  any  relation  to  the  density  of  population? 

3.  Has  the  isothermal  line  any  relation  to  the  number  of  million- 
aires ? 

4.  What    physical    reasons    account    for    the    greatness    of    ancient 
Egypt,  of  Venice,  of  Holland,  of  England,  of  the  United  States? 

5.  Is  all  land  useful?     Is  all  land  wealth? 

6  Is  there  a  different  term  for  land  that  is  wealth  and  land  that  is 
not? 

7.  Are  there  different  economic  terms  for  hewn  and  unhewn  blocks  of 
stone?  What  makes  the  difference? 

NOTE. — A  meritorious  though  fragmentary  essay  to  rethink  the  old 
conception  of  natural  resources  and  to  express  them  in  new  terms, 
is  Natural  Economy,  by  A.  H.  Gibson,  1901,  reviewed  by  the  writer 
in  Journal  of  Political  Economy,  March,  1902. 


CHAPTER  19.     SAVING  AND  PRODUCTION  AS  AFFECTED  BY  THE 
RATE  OF  INTEREST 

1.  The   savings   of  the   people   of   the   United    States   are   nearly   a 
billion  dollars  a  year.     What  and  where  are  they  ? 

2.  What  are  the  main  social  conditions  necessary  to  saving? 

3.  What  influence  has  commercial  morality  on  saving? 

4.  Do  savings-banks   and  insurance   companies   stimulate  saving,   or 
do  they  exist  because  of  a  disposition  to  save? 

5.  What   influence   has   the   formation   of   joint-stock   companies   on 
saving  ? 

6.  Will  you  save  more  or  less  if  the  rate  of  interest  falls? 

7.  Distinguish  between  hoarding  and  saving. 

8.  A  woman  cut  the  wool  from  a  sheep's  back,  spun  and  wove  it 
by  old  hand-methods,  and  within  twenty-four  hours  wore  the  dress  made 
of  it.     Is  more  or  less  time  needed  in  production  with  the  best  ma- 
chinery and  processes? 

9.  Ricardo  said  that  on  account  of  the  cheapness  of  food  in  America 
there  was  less  temptation  to  employ  machines  than  in  England,  where 

food  was  high.     What  is  the  fact  about  this  temptation  in  America? 
37 


578  QUESTIONS  AND  CRITICAL  NOTES 

NOTE.— The  older  abstinence  theory  of  interest  is  given  by  F.  A. 
Walker,  Political  Economy,  Sees.  87-93.  A  noteworthy  advance  was 
the  able  article,  by  T.  N.  Carver,  in  Quarterly  Journal  of  Economics, 
Vol.  VIII,  p.  40  (1893),  "The  Place  of  Abstinence  in  the  Theory  of 
Interest."  A  number  of  writers  have  written  (fallaciously,  in  our 
judgment)  on  the  "fallacy  of  saving,"  arguing  that  the  capital- 
market  easily  becomes  glutted;  the  contrary  view  is  well  presented  by 
Cassel,  The  Nature  and  Necessity  of  Interest  (1903),  pp.  96-157,  in 
chapters  on  what  he  calls  "The  Demand  for  Waiting,"  and  "The 
Supply  of  Waiting." 

CHAPTER  20.    LABOR  AND  CLASSES  OF  LABORERS 

1.  Is   dancing  labor?     Is  the   dancing  of   a   dancing-master  labor! 
If  he  would  rather  dance  than  eat,  is  it  labor? 

2.  Enumerate  some  kinds  of  labor  necessary  to  produce  bread. 

3.  "Washing   of  clothes  is  unproductive  labor;    therefore   as  little 
of  it  should  be  done  as  possible. ' '     Criticize  the  argument. 

4.  Would  you  say  that  differences  in  ability  at  manual  trades  are 
due  to  practice  or  to  native  talent?     If  to  both,  in  what  proportion? 

5.  Do  sons  usually  follow  the  father's  trade?     Is  it   more  or  less 
common  than  formerly  for  them  to  do  so? 

6.  Do  you  know  from  personal  observation  whether   a  Mexican,   a 
German,  or  an  American,  is  the  best  workman? 

7.  What  important   personal  traits  are  needed  to  make  a  man   an 
efficient  market-gardener  ? 

8.  Which  would  be  of  the  greatest  economic  advantage,  to  increase 
by  50%  the  intelligence,  the  physical  strength,  or  the  integrity  of  the 
workers  of  this  country? 

CHAPTER  21.    THE  SUPPLY  OF  LABOR 

1.  Has   the   principle    of   the   survival   of   the   fittest    any   influence 
on  the  population  of  America? 

2.  What  limits  the  number  of  wild  rabbits?     Of  tame  pigeons?     Do 
the  same  influences  act  in  the  case  of  men? 

3.  What    other   influences   affect   population? 

4.  What  relation  is  there  between  population  and  mountains,  tem- 
perature and  water-supply? 

5.  It  has  been  said  that  the  supply  of  labor  is  fixed  by  biologic 
laws.     Is  it  therefore  not  subject  to  economic  influences? 

6.  What  application  do  you  think  the  principle  of  diminishing  re- 
turns has  to  the  question  of  population? 

7.  What  is  meant  by  the  standard  of  life? 

NOTE.— The  subject  of  population  generally  is  discussed  under  the 
name  of  "The  Malthusian  Doctrine"  and  much  space  is  given  to  it 


QUESTIONS  AND  CRITICAL  NOTES  579 

in  the  texts.  So  much  useless  controversy  has  been  occasioned  by  the 
ambiguities  of  Malthus  's  argument  that  it  seemed  best  not  to  introduce 
this  difficulty  into  the  text.  The  subject  is  discussed  with  broadest 
view  by  A.  T.  Hadley,  Economics,  Sees.  47-60.  The  writer  attempted 
to  make  a  judicial  study  of  Malthus  and  his  work  in  Versuch  einer 
Bevolkerungslelire,  Jena,  1894,  and  sought  to  put  the  discussion  on 
higher  ground  in  an  article  in  the  Tale  Review,  August,  1898,  *  *  The 
Essay  of  Malthus,  a  Centennial  Keview. ' ' 

CHAPTER  22.     CONDITIONS  FOR  EFFICIENT  LABOR 

1.  Is  hunger  the  cause  of  food? 

2.  Is  there  any  relation  between  a  republican  form  of  government 
and  the  growth  of  manufactures. 

3.  What  are  the  necessary  conditions  to  the  building  of  a  house: 
(a)   natural  forces;    (b)    changes  in  material  things;    (c)    human  ac- 
tivities;   (d)   social  conditions? 

4.  Is  the  public  school  system  an  economic  factor?     Where  among 
the  four  preceding  heads  would  you  classify  it? 

5.  From  an  economic  standpoint,  can  we  say  that  robbery  really 
reduces*  the  wealth  in  existence? 

6.  When  does  an  industrious  man  stop  working  on  his  own  farm, 
and  why? 

7.  With  a  given  number  of  workers,  what  may  be  causes  of  dif- 
ferences in  the  labor-supply? 

8.  Would  men  work  better  if  they  ate  more? 

9.  What  moral  agencies  increase  the  efficiency  of  labor? 

10.  Is  there  a  strong  selfish  motive  for  men  to  increase  their  effi- 
ciency in  most  industries?     How  effective  is  it? 

11.  What    effect    has    republican    government    on    the    efficiency    of 
labor? 

12.  Why  is  the  variety  of  occupations  greater  or  less  than  formerly? 
What  is  influencing  the  change? 

13.  What  cases  have  you  seen  where  great  skill  came  from  practice? 

14.  What  gain  is  it   for  men  to  work  together  instead  of  singly? 

15.  With  increasing   division   of  labor  is  there  greater   or  less   op- 
portunity  for  the   payment   of   laborers   according  to   the   piece-wage 
plan? 

16.  Discuss  the  following  statement:    Under  the  piece-work  system 
the  foreman  looks  out  for  the  quality  and  the  operative  for  the  quan- 
tity of  the  work;  under  the  time-wage  system  the  foreman  looks  out 
for  the  quantity  and  the  laborer  for  the  quality  of  the  work. 

17.  What  remedy  has  the  foreman  for  an  inefficient  laborer  working 
under  the  time-wage  system? 

18.  Is  time-  or  piece-work  best  adapted  to  the  following  kinds  of 


580  QUESTIONS  AND  CRITICAL  NOTES 

laborers:    coal-miners,   coopers,    farm-hands,   printers,   engravers,   shoe- 
factory  hands,  railroad  brakemen,  telegraph  operators? 

CHAPTER  23.     THE  LAW  OF  WAGES 

1.  What  is  the  effect  of  free  common  schools  on  the  comparative 
wages  of  skilled  and  of  unskilled  laborers? 

2.  What  would  be  the  effect  of  technical  and  industrial  schools  on 
the  wages  of  artisans? 

3.  If  a  man  is  not  content  with  $2  a  day,  why  does  he  not  do  work 
that  is  paid  $5  a  day? 

4.  What  is  the  effect  on  wages  of  differences  in  the  danger,  plea- 
surableness,  social  distinction,  expense  of  preparation,  of  occupation? 

5.  If  women  are  paid  less  than  men  for  the  same  work,  why  are 
men  employed  at  all? 

6.  What  is  the   difference  between  these   definitions:    wages  is  the 
share  of  labor;  wages  is  the  payment  by  one  man  to  another  for  his 
services? 

7.  If  the  supply  of  labor  of  any  class  were  to  be  decreased  10% 
would  wages  rise  in  like  proportion? 

8.  Since  under  the  piece-work  system  a  man  is  paid  only  for  what 
he   does,   is   there    any   reason   for    discharging   a   workman    employed 
under  this  plan  whose  efficiency  falls  below  the  average? 

CHAPTER  24.     THE  RELATION  OF  LABOR  TO  VALUE 

1.  May  a  singer  of  songs  or  a  mixer  of  drinks  be  called  a  productive 
laborer? 

2.  Are  fine  products  high  in  price  because  wages  are  high,  or  vice 
versa? 

3.  Is   common,   unskilled  labor   "scarce''    (in  any   reasonable   sense 
of  the  word)  in  China?  in  the  United  States? 

4.  Can  a  manufacturer  pay  the  same  to  laborers  if  the  product  will 
be  marketed  next  year,  as  he  can  if  it  is  to  be  marketed  to-morrow? 
If  so,  how  is  the  value  of  the  labor  adjusted  to  its  product? 

NOTE. — An  able  discussion  of  the  effect  of  discounting  in  the  sale 
of  labor  in  the  market  is  given  by  Bb'hm-Bawerk,  Positive  Theory  of 
Capital,  pp.  313-318  et  seq.;  see  also  Wieser,  Natural  Value,  numerous 
passages.  The  changes  in  industrial  organization  are  treated  with 
historic  insight  by  Hadley,  Economics,  Sees.  341-354.  F.  W.  Taussig's 
Wages  and  Capital  (1896)  gives  a  sympathetic  interpretation  of  the 
wage-fund  doctrine;  the  work  is  especially  valuable  for  its  excellent 
review  of  the  history  of  the  subject  and  for  the  chapters  analyzing 
the  modern  industrial  process. 


QUESTIONS  AND  CRITICAL  NOTES  581 

CHAPTER  25.     THE  WAGE  SYSTEM  AND  ITS  EESULTS 

1.  Why  has  machinery  changed  the  relations  of  workman  to  master? 

2.  In  what  ways  does  labor  get  paid  for  its  share,  and  who  pays  it? 

3.  Will  a  day's  work  of  a  common  laborer  buy  more  to-day  than  it 
would  a  half  century  ago?     Why? 

4.  Are  the  opportunities  for  workmen  to  rise  to  the  rank  of  masters 
as  great  as  formerly? 

5.  Are  wages  independent  of  the  other  kinds  of  income? 

CHAPTER  26.     MACHINERY  AND  LABOR 

1.  Do  you  think  that  the  amount  of  work  is  reduced  by  new  ma- 
chinery?    Point  out  ambiguities  in  the  question. 

2.  What  is  the  difference  to  the  workman  whether  he  becomes  more 
efficient  or  works  with  a  better  machine? 

3.  Is  the  work  of  any  kind  fixed  in  quantity?     What  would  cause 
it  to  change? 

4.  What  kinds  of  laborers  were  thrown  out  of  employment  by  the 
invention   of   the   type-writer?     What   kinds   of   labor   found   employ- 
ment as  a  result  of  its  invention?    Was  the  net  result  a  gain  or  a  loss 
of  employment? 

5.  Answer  the  same  questions  with  regard  to  the  invention  of  rail- 
roads, mowing-,  binding-,  and  threshing-machines;   or  the  new  roller- 
process  of  flour  milling. 

6.  Can  you  describe  from  your  own  experience  any  example  of  re- 
adjustment of  labor  due  to  introduction  of  new  machinery? 

CHAPTER  27.     TRADE-UNIONS 

1.  Does  it  make   any   difference  in  the  permanence   of   an  increase 
of  wages  brought  about  by  a  strike,  whether  the  employer  is  one  of 
the  more  successful  or  one  of  the  less  successful  in  that  business? 

2.  Is  there  any  similarity  between  the  methods  of  trade-unions  and 
the  etiquette  of  the  medical  and  the  legal  professions? 

3.  If  you  were  an  officer  of  a  trade-union,  would  you  begin  a  strike 
when  trade  was  good  or  when  it  was  poor? 

4.  If  you  can  do  more  work  in  two  hours  than  in  one,  can  you  do 
more  continuously  in  sixteen  consecutive  hours  than  in  eight? 

5.  What     determines     the    maximum     study-time    for    the     earnest 
student  ? 

6.  If  as  much  is  produced  in  a  general  eight-hour  day,  who  benefits? 

7.  If  production  is  reduced  one  fourth  by  shorter  hours,  is  "work 
made"  to  that  degree  for  the  unemployed? 


582  QUESTIONS  AND  CRITICAL  NOTES 

8.  If  all  day-laborers  should  agree  to  work  with  one  hand  tied  be- 
hind them,  would  their  wages  go  up  or  down?  Would  it  be  good  or 
bad  for  the  whole  class  of  laborers? 

CHAPTER  28.     PRODUCTION  AND  THE  COMBINATION  OF  THE  FACTORS 

1.  What  is  production?     Does  the  economic  idea  of  production  con- 
flict with  the  physical  principle  that  matter  cannot  be  created? 

2.  Is  it  production  to  buy  fifty  cents'  worth  of  yarn  and  knit  a 
pair  of  socks  worth  twenty -five  cents  if  you  enjoy  doing  it?     If  you  do 
not  enjoy  it? 

3.  Give  examples  of  factors  of  production. 

4.  What  factors  of  production  must  be  combined  by  a  savage  to 
produce  a  canoe? 

5.  Outline  the  combination  of  factors  that  has  produced  New  York 
bread  made  from  Minnesota  wheat. 

6.  What  is  the  largest  manufacturing  establishment  in  your  home 
town?     Would  a  number  of  smaller  establishments  of  the  same  sort 
and  with  the  same  aggregate  capacity  succeed  as  well?    Why? 

7.  Have  you   observed  the   growth   of   any  local  industry   from   a 
small   beginning  to   large   proportions?     If   so,   how   do   you   account 
for  it? 

8.  Would  you  prefer  to  begin  your  business  career  with   a  large 
company  or  with  a  small  merchant?     Why? 

9.  Through  what  historic  stages  has  production  passed? 

10.  Give  examples  of  the  industrial  advantages  of  America  as  com- 
pared with  Europe. 

CHAPTER  29.     BUSINESS  ORGANIZATION  AND  THE  ENTERPRISER'S 
FUNCTION 

1.  What    is    the    relative    importance    of    organization    in    sawing 
wood,  building  houses,  running  a  small  store,  or  a  large  factory? 

2.  Which  wins  the  battle:    the  general,  the  soldiers,  or  the  arma- 
ment? 

3.  What  determines  whether  a  crop  is  poor  or  good:   the  ground, 
the  weather,  or  the  farmer? 

4.  Why  do  some  businesses  give  increasing  returns  as  they  grow? 

5.  One   has   said:    "The   natural   differences   in   powers   and    apti- 
tudes are  certainly  not  greater  than  are  natural   differences  in  stat- 
ure. "     Is  this  sound  in  an  economic  sense? 

6.  Who    runs    the    business    in    a    large    store    owned    by    a    large 
family?    Who  has  the  risk? 

7.  Who  is  the   enterpriser  in  a  stock  company  where  there   is  a 


QUESTIONS  AND  CRITICAL  NOTES  583 

superintendent    elected    by    a    board    of    directors,    themselves    elected 
by  shareholders  with  one  vote  per  share? 

8.  Who  is  the  employer  in  a  cooperative  cooper-shop  whose  super- 
intendent is  elected  by  the  workmen? 

9.  Has  "a  good  chance  in  life"  much  to  do  with  success! 

10.  What  are  the  chief  elements  of  business  success? 

11.  Is  modern  business  competition  a  competition  of  men  only? 

CHAPTER  30.     COST  OF  PRODUCTION 

1.  What  is  the  cost  of  a  good  you  have  made  entirely  with  your 
own  labor? 

2.  What   is  the   difference   to   the   employer  between   rent,   interest, 
and  wages  as  items  of  cost? 

3.  Is  there  anything  in  common  between  "cost,  the   onerous  exer- 
tion necessary  to  get  goods,"  and  cost  as  the  money  expenses  of  pro- 
duction? 

4.  Why   does   a   merchant   engage    in    one    business    rather   than   in 
another? 

5.  When   prices    fall,   what   determines   which    factories    shall   close, 
and  which  workmen  shall  be  discharged? 

6.  Does  the  value  of  a  product  conform  to  the  capital  that  has  been 
put  into  it. 

NOTE.— For  a  fuller  treatment  of  the  more  recent  view  of  the  sub- 
ject, see  Smart,  pp.  64-83;  Wieser,  Natural  Value,  pp.  171-214;  Bohm- 
Bawerk,  Positive  Theory  of  Capital,  pp.  179-189,  223-234.  The  defects 
of  such  revisions  as  that  attempted  by  Alfred  Marshall  are  pointed  out 
in  Quarterly  Journal  of  Economics,  Vol.  XV,  pp.  432-452,  article 
1 '  The  Passing  of  the  Old  Eent  Concept. ' ' 

CHAPTER  31.     THE  LAW  OF  PROFITS 

1.  Business  being  poor,  one  employer  is  making  good  profits;   how 
different  will  be  the  wages  he  pays  from  those  paid  by  the  unsuccess- 
ful employer? 

2.  How  many  of  the  men  you  know  at  the  head  of  large  businesses 
started  life  poor? 

3.  Was  the  rise  in  fortune  due  most  often  to  chance,  inheritance  of 
wealth,  or  exceptional  ability  and  power  of  work? 

4.  How  should  the  income  of  an  inventor  be  classified,  as  wages  or 
profits  ? 

5.  Are  the  profits  of  the  employer  deducted  from  wages?     Are  the 
high  wages  of  skilled  labor  deducted  from  the  wages  of  unskilled? 


584  QUESTIONS  AND  CRITICAL  NOTES 

CHAPTER   32.     PROFIT-SHARING,    PRODUCERS  '   AND   CONSUMERS  ' 
COOPERATION 

1.  Describe  any  case  of  profit-sharing  you  may  have  seen  in  opera- 
tion. 

2.  Is   advertising    of   any   social   service    or    is    its   sole    purpose    to 
divert  trade  from  one  merchant  to  another? 

3.  In  what   ways   are  retail  stores   wasteful   in  their   expenditures? 
Can  this  be  avoided? 

4.  If  you  have  seen  a  cooperative  store  in  operation  tell  what  was 
its  success. 

5.  Are  you  willing  to  pay  more  for  goods  in  order  to  have  a  choice 
of  stores? 

CHAPTER  33.    MONOPOLY  PROFITS 

1.  How  is  the  blacksmith  free  to  compete  with  the  physician  and 
how  not?     In  what  sense  have  we  assumed  that  competition  exists? 

2.  Is  there   competition  between  the   owner   of  good   land   and   the 
owner  of  poor  land? 

3.  Has  the  owner  of  a  poor  gold-mine  a  monopoly?    Has  the  owner 
of  a  rich  mine  a  monopoly? 

4.  Does  the   ownership   of   land  give   a  monopoly?     The   ownership 
of  a  horse? 

5.  In  what  sense  is  a  street-railway  a  monopoly?    What  is  the  value 
of  its  franchise? 

6.  Why  does  the  public  consent  to  grant  patents  or  public  franchises  ? 

7.  If  one  company  controlled  all  the  petroleum  in  the  world,  what 
would  it  consider  in  fixing  the  selling  price? 

8.  Why  will  railroads  issue  .commutation  tickets? 

NOTE. — Of  the  very  large  recent  literature  bearing  on  monopoly 
and  trusts  may  be  mentioned  as  especially  useful:  J.  B.  Clark,  Control 
of  Trusts;  R.  T.  Ely,  Monopolies  and  Trusts;  J.  W.  Jenks,  The  Trust 
Problem  (a  summary  by  the  expert  for  the  Industrial  Commission)  ; 
J.  E.  le  Eossignol,  Monopolies,  Past  and  Present;  Eeport  of  the  Chi- 
cago Conference  on  Trusts,  1899;  Eeport  of  the  United  States  Indus- 
trial Commission,  19  vols.,  1900-2  (a  mine  of  information). 


CHAPTER  34.    GROWTH  OF  TRUSTS  AND  COMBINATIONS 

1.  What  advantages  are  there  to  manufacturers  in  combination  ?  What 
to  the  public? 

2.  What  relation  has  improved  transportation  and  other  means   of 
communication  to  trusts? 

3.  Name  as  many  economic  monopolies  as  you  can. 


QUESTIONS  AND   CRITICAL  NOTES  585 

4.  What  large  trusts  have  recently  been  formed? 

5.  Does  the  public  consider  the  growth  of  trusts  to  be  good  or  bad? 
What  do  students  of  the  question  think  of  it? 

CHAPTER  35.     EFFECT  OF  TRUSTS  ON  PRICES 

V 

1.  Can  the  lai£e  factory  always  outsell  the  small  one?     Why? 

2.  Why  are  trusts  or  selling  agreements  formed? 

3.  Describe  any  agreement  of  which  you  know,  made  between  mer- 
chants  or  manufacturers   for  the  purpose   of   regulating  prices.     Did 
prices  go  up  or  down  as  a  result? 

4.  Would   it   be   a   good   thing   for   society   if    a   trust   made    great 
economies    in    production,    crowded    out    its    smaller    competitors,    and 
maintained   prices   just   where    they   were   before,    dividing   among   its 
shareholders  the  amounts  saved? 

5.  How   would   the   effects    on   society   be    different   if   prices   were 
reduced  by  better  organization  and.  the  prevention  of  waste? 

6.  Is  it  good  public  policy  to  allow  a  trust  to  undersell  its  smaller 
competitor  in  one  district  while  it  keeps  up  its  prices  elsewhere? 

CHAPTER  36.     GAMBLING,  SPECULATION,  AND  PROMOTERS'  PROFITS 

1.  Do  you  think  that  store-keepers  fix  the  price  of  the  produce  they 
buy  of  the  farmers?    If  so,  to  what  extent? 

2.  Can  brokers  fix  the  price   of  grain  on  the  market?     How,   and 
to  what  extent? 

3.  What  is  speculation?     Give  examples  you  have  seen. 

4.  Were  they,  on  the  whole,  good  for  the  community? 

5.  Give  other  examples  showing  the  difference  between  a  gambling- 
house  and  an  insurance  company?  * 

6.  Is  the  immorality  of  betting  based  on  economic  grounds? 

7.  Ought  lotteries  to  be  permitted  by  law? 

8.  Ought  speculation  in  mines  to  be  permitted  by  law? 

9.  Ought  the  profits  of  the  farmer  from  a  sudden  rise  in  the  value 
of  wheat  be  confiscated  to  the  public? 

NOTE. — The  ablest  study  of  the  subject  is  by  H.  C.  Emery,  Specu- 
lation on  the  Stock  and  Produce  Exchanges  of  the  United  States,  in 
Columbia-  University  Studies  in  History,  Economics,  and  Public  Law, 
Vol.  VII,  No.  2,  1896. 

CHAPTER  37.     CRISES  AND  INDUSTRIAL  DEPRESSIONS 

1.  What  is  a  financial  crisis?     An  industrial  depression? 

2.  Define  the  expressions  "over-production"   and   ' ' underconsump- 
tion. ' ' 


586  QUESTIONS  AND  CRITICAL  NOTES 

3.  In  a  period  of  depression  is  there  less  money  than  usual  in  the 
country?     In  the  banks? 

4.  If  there  were  twice  as  much  money  in  the  world,  would  panics 
take  place? 

5.  Before  a  financial  crisis  how  are  prices,  high  or  low?     After  a 
panic  I 

6.  What  economic  changes  occurred  in  your  own  community  in  the 
panic  of  1893-4,  or  in  the  years  1903-4? 

7.  Do  people  save  more  in  good  times  or  hard  times? 

CHAPTER  38.     PRIVATE  PROPERTY  AND  INHERITANCE 

1.  If  the  law  permits  certain  classes  to  be  fleeced  without  redress, 
is  wealth  thereby  reduced? 

2.  What    are   vested   rights?     Do    they   ever   stand    in   the    way    of 
progress  ?     Examples. 

3.  Is  it  right  that  the  lucky  inventor  of  a  popular  toy  should  make 
$100  a  day  from  it? 

4.  Is  it  right   that   an  inventor  should   by  patent   laws  be   able  to 
keep  the  profits  of  his  business  high? 

5.  Do  you  know  of  any  father  who  created  more  wealth  because  he 
oould  bequeath  it  to  his  son? 

6.  Does  the  son  work  as  hard  when  he  inherits  his  father's  wealth? 

7.  What  is  the  effect  of  private  property  on  saving? 

8.  If  capital  is  needed  in  production  why  is  the  question  of  justice 
raised  when  its  use  is  paid  for? 

CHAPTER  39.     INCOME  AND  SOCIAL  SERVICE 

1.  What  is  it  to  earn  a  living?     How  many  people  do  it? 

2.  When  is  a  man  poor? 

3.  Would  it  be  a  good  thing  if  the  boot-black  got  a  dollar  a  shine? 

4.  Does  luck  have   greater  influence   on  business  success  in  an   old 
country  or  a  new  one? 

5.  Ditto  in  agriculture,  mining,  commerce,  or  manufactures? 

6.  A  rare  coin  and  a  piece  of  land  sold  for  the  same  price  one  year, 
and  the  next  year  both  sold  for  double  the  amount.     Was  there  an 
unearned  increment   in  both   cases,   and   of   the   same   kind? 

7.  If  rewards  were  equal,  what  would  determine  the  choice  of  work? 

NOTE. — The  most  important  contributions  to  the  theory  of  con- 
sumption have  been  made  by  S.  N.  Patten  in  his  numerous  writings, 
among  them:  The  Consumption  of  Wealth  (1889);  Theory  of  Dy- 
namic Economics  (1892);  The  Theory  of  Prosperity  (1902).  A 


QUESTIONS  AND  CRITICAL  NOTES  587 

number  of  the  ideas  are  well  restated  in  more  simple  terms  by 
E.  T.  Devine  in  Economics,  especially  pp.  375-396,  and  73-111  (applies 
to  chapter  41). 

CHAPTER  40.     WASTE  AND  LUXURY 

1.  Can  we  determine  what  luxury  is,  or  give  the  notion  definiteness? 

2.  Do  you  feel  a  sense  of  injustice  when  you  read  of  a  millionaire 's 
ball  if  you  are  not  a  millionaire? 

3.  Can  you  excuse  the  sense  of  injustice  felt  by  the  hungry  man 
when  he  sees  you  wear  patent-leather  shoes  and  kid  gloves? 

4.  Under   private    property,    can    men   complain   of   the   use    made 
by  others  of  their  wealth  on  the  ground  merely  that  it  was  unwise? 

5.  Is  luxury  necessary  to  give  employment  to  labor? 

6.  Is  the  spendthrift  the  best  friend  of  labor? 

7.  Ought    legislation    attempt    to    prevent    luxury,    or    can    public 
opinion  affect  it? 

8.  Is  smoking  high-priced  cigars  economically  justifiable,  assuming 
that  the  smoker  is  wealthy  and  does  not  injure  his  health  thereby? 

9.  Wines,   balls,   pensions   are   said   to   be   good   because   they   put 
money  into  circulation.     Criticize. 

10.  What  is  the  difference  between  the  consumption  of  wealth  and 
its  destruction? 

11.  In  what  ways  can   a  piece   of  iron  be  consumed,   economically 
speaking? 

12.  Was  the  great  Chicago  fire,  which  led  to  the  rebuilding  of  the 
city,  a  good  thing  economically? 

CHAPTER  41.     REACTION  OF  CONSUMPTION  ON  PRODUCTION 

1.  What  are  complementary  goods?     Give  some  illustrations. 

2.  Can   people   live    on   the   future,    consuming   in   advance    of   pro- 
duction?    How  is  it  with  the  nation  in  time  of  war? 

3.  Does  economic  theory  throw  any  light  on  the  ethics  of  miserliness  ? 

4.  It  is  said  that  the  demand  of  the  day-laborer  for  cheap  white 
shirts  has  reduced  the  wages  of  the  women  who  make  them.     Criticize. 

5.  What  effect  on  wealth  would  a  change  of  climate  have,  wherebj 
the  consumption  of  coal  would  be  decreased? 

6.  If   manna   fell   from   heaven   daily   in   a   climate   where   clothing 
and  shelter  were  unnecessary,  what  effect  on  wealth  would  result? 

CHAPTER  42.     DISTRIBUTION  OF  THE  SOCIAL  INCOME 

1.  What     different     ideas     does    the     expression     "distribution     of 
wealth ' '  suggest  to  you  ? 

2.  What  different  methods  of  obtaining  an  income  have  you  noted 
among  the  men  you  know? 


588  QUESTIONS  AND  CRITICAL  NOTES 

3.  How  can  a  yard  of  cloth  be  said  to  be  distributed  to  the  labor 
and  capital  producing  it? 

4.  If  two  men  of  equal  skill  go  fishing  together,   how  would  they 
find  a  rule  for  dividing  the  catch? 

5.  If   one   is  more   skilful   or   stronger,    or   owns   the   boat   and   the 
tackle,  how  would  it  affect  the  division?     Would  any  rule  be  attain- 
able? 

6.  If  socialism  reduced  the  total  product,  would  it  still  be  desirable 
because  of  the  better  distribution? 

7.  What  classes  of  thinkers  are  most  inclined  to  take  up  socialism? 
(Classes   considered   socially,   industrially,   as   to   race,   as   to   economic 
and  historical  training.) 

CHAPTER  43.     SURVEY  OF  THE  THEORY  OF  VALUE 

1.  Mention  any  cases  you  can  think  of  where  merely  changing  the 
place  of  things  added  to  their  value;  or  changing  their  form;  or  where 
the  mere  lapse  of  time  added  to  the  value  of  the  thing. 

2.  What  effect  on  wages  and  interest  does  the  bringing  in  of  for- 
eign capital  have? 

3.  If,  through  greater  efficiency  of  labor,  wealth  increases,  which 
share  benefits? 

4.  What  would  be  the  effect  on  wages,  interest,  and  land  rent  of  a 
sudden  addition  of  rich  land  to  the  country? 

5.  What  would  be  the  effect  on  interest,  land  rent,  and  wages  of 
a  great  increase  of  national  saving? 

6.  What  concern  have  the  poor  in  the  abundance  of  capital?     The 
rich  in  the  abundance  of  labor? 

7.  Walker  says  that  the  laborer  gets  what  is  left  after  the  other 
shares  are   deducted  according  to   their  law;    wages   are  the  residual 
claimant.     Are  the  other  shares  independent  of  wages? 

8.  Can  wage-earners  be  shut  out  from  all  advantages  in  the  land 
of  the  country? 

9.  Are  high   wages   and   high   interest   seen  to  -go   together?     Give 
such  examples  as  you  think  of. 

10.  Do   improvements   in   agriculture   increase   or   decrease   the   rent 
of  land? 

CHAPTER  44.     FREE  COMPETITION  AND  STATE  ACTION 

1.  What  is  economic  freedom?     How  different  from  political  free- 
dom? 

2.  Does  the  presence  of  a  policeman  increase  or  diminish  competi- 
tion among  men? 


QUESTIONS  AND  CRITICAL  NOTES  589 

3.  Are  most  positive  laws  intended   to   hinder  competition   or  make 
it  freer? 

4.  In  what  ways  does  competition  reduce  the  total  product1? 

5.  Is  custom  a  better  regulator  of  economic  action  than  competition? 

6.  Criticize  the  doctrine  of  economic  harmony,  giving  examples. 

CHAPTER  45.     USE,  COINAGE,   AND  VALUE  OF  MONEY 

1.  If  gold  were  to  become  as  plentiful  as  iron,  would  it  be  worth 
more  or  less  than  iron? 

2.  Some  say  Providence  has  indicated  gold  and  silver  as  the  ma- 
terials for  money.     How  has  this  been  done? 

3.  Why  does  nearly  all  the  gold  produced  in  California  leave  the 
state?     What  keeps  any  of  it  there? 

4.  Who  makes  coins?     Would  jewelers  make  better  ones? 

5.  When  gold  comes  out  of  the  mine  is  the  gain  to  the   commu- 
nity greater  or  less  than  when  the  same  value  of  grain  is  harvested? 

6.  Does  gold  cost  the  day-laborer  as  much  in  California  as  in  New 
York? 

7.  What  are  the  principal  things  besides  money  uses  that  cause  a 
demand  for  gold  and  silver? 

8.  The  mint  price  of  an  ounce  of  gold,  .900  fine,  is  alike  at  San 
Francisco  and  Philadelphia,  $18.604.     Why  is  gold  ever  shipped  from 
California  to  New  York? 

9.  Give  examples  of  things  that  increase  the  demand  for  money. 

10.  Note  any  habits  of  friends  that   result  in  their  carrying  more 
or  less  money  than  others  of  the  same  .income. 

11.  What  determines  the  amount  of  money  needed  by  different  per- 
sons, towns,  states,  and  nations? 

12.  When  goods  are  exchanged  for  money  or  money  for  goods,  what 
is  the  gain? 

13.  On  an  isolated  island  would  it  make  any  difference  as  to  the 
value  of  money  if  there  were  but  one  gold-mine  or  several  competing 
ones,  supposing  that  the  output  were  the  same? 

CHAPTER  46.     TOKEN   COINAGE  AND  GOVERNMENT  PAPER   MONEY 

1.  Define  legal-tender  as  applied  to  money.     What  is  meant  by  fiat 
money  ? 

2.  Show  the  difference  between  convertible  and  inconvertible  money. 

3.  The    government    of   the   island    of    Guernsey   having   no   money, 
issued  paper-notes  to  pay  for  the  building  of  a  market.     They  cir- 
culated and  were  gradually  taken  up  as  the  market  earned  its  cost, 
during   ten   years.      When   they   were    all   redeemed    and    burned,    the 


590  QUESTIONS  AND  CRITICAL  NOTES 

island  had  the  market  free  of  cost.     Explain  how  this  could  be  done. 
(This  is  from   Sumner's  Problems  in  Political  Economy.) 


CHAPTER  47.     THE   STANDARD  or  DEFERRED  PAYMENTS 

1.  If  every  piece   of   money  should  miraculously   be   doubled  in   a 
night,  whose  interests  would  be  affected? 

2.  Is    the    fact    of    one   man 's    gain    and    another    man 's    loss    by 
chance  of  any  economic  or  political  importance? 

3.  What  gives  rise  to  the  belief  sometimes  held  that  money  is  an 
invariable  standard  of  value? 

4.  Is  there  anything  in  the  nature  of  mining  that  keeps  the  ratio 
of  the  supply  of  gold  and  silver  nearly  uniform? 

5.  Is  the  value  of  gold  and  silver  due  to  the  action  of  government? 

6.  Does  the  principle  of  the  substitution  of  goods  have  any  bear- 
ing on  the  value  of  metals  under  bimetallism? 

7.  Note  carefully,  and  indicate  the  different  meanings  of  bimetal- 
lism;  of  demonetization. 

8.  What  is  the  extent  of  the  influence  one  nation  can  have  on  the 
ratio  of  the  two  precious  metals? 

9.  If  money  wages  are  higher  and  general  prices  are  lower,  how 
is  the  laborer  affected?    Is  this  due  to  the  appreciation  of  money? 

10.  Can  you  get  a  kind  of  money  that  will  make  the  things  that  are 
sold,  dearer,  and  the  things  that  are  bought,  cheaper? 

11.  What  are  the  main  reasons  given  for  the  ratio  of  16  to  1? 

CHAPTER  48.     BANKING  AND  CREDIT 

1.  What  does  a  bank  do  for  a  community? 

2.  What  are  the  sources  of  income  to  a  bank? 

3.  Can  a  bank  that  issues  its  own  notes  afford  to  lend  cheaper  than 
the  ordinary  capitalist? 

4.  What  is  discount  and  deposit? 

5.  Do  all  banks  issue  notes?     Why? 

6.  What  is  the  function  of  a  clearing-house? 

7.  If  there  are  twenty  banks  in  a  town  and  no  clearing-house,  how 
many  collections  would  have  to  be  made  by  all  the  banks  daily  as- 
suming that  each  day  depositors  of  each  bank  receive  checks  on  the 
other  nineteen  banks? 

8.  Does  a  clearing-house  enable  the  banks  that  belong  to  it  to  get 
along  with  a  smaller  cash  reserve? 

9.  What  element  of  security  is  furnished  by  clearing-houses  during 
panics  ? 


QUESTIONS   AND  CRITICAL  NOTES  591 

CHAPTER  49.     TAXATION  IN  ITS  KELATION  TO  VALUE 

1.  Does  taxation  ever  infringe  on  the  right  of  private  property! 

2.  What  is  it  a  citizen  gets  in  return  for  his  taxes? 

3.  Is  there   any  relation   between   the   taxes   paid   and   the   benefits 
secured  from  government? 

4.  A  recent  newspaper  item  says:   "This  is  the  year  real  estate  is 
assessed.     Turn  the  cow  loose  in  the  front  yard,  tear  down  the  fence, 
make  things  look  generally  dilapidated,  for  it  will  be  money  in  your 
pocket."     What  does  this  indicate  regarding  taxation? 

5.  The  parts  of  an  estate  divided  into  fifteen  equal  shares  by  expert 
real  estate   agents  were  soon   after  assessed  variously   from   $900   to 
$2850   for   purposes   of  taxation.     What   does   this   indicate?      (From 
Sumner's  Problems.) 

6.  In  what  ways  may  we  understand  the  proposition  that  taxation 
should  be  proportioned  to  ability? 

7.  Can   taxation   be    used   to   secure   some    of   the   profits    of    large 
corporations? 

CHAPTER  50.     THE  GENERAL  THEORY  OF  INTERNATIONAL  TRADE 

1.  Is  it  bad  policy  to  let  the  people  of  Palo  Alto  spend  money  in 
San  Francisco  for  things  that  could  be  produced  at  home? 

2.  Pensions  are  defended  as  putting  money  in  circulation.     Is  this 
like  any  tariff  arguments  you  have  heard? 

3.  Is  it  bad  policy  for  California  to  buy  New   England  manufac- 
tures ? 

4.  If  there  were  no  legal  bar  to  a  tariff  between  the  states,  would 
a  tariff  probably  be  imposed?     If  so,  would  it  be  a  wise  measure? 

5.  A  nation  with  n  dollars  in  circulation  has  to  pay  a  war  indemnity 
of  n  dollars  to  another  country  having  the  same  circulation,  how  much 
money  will  each  then  have,   and  what   will   be   the   effect   on   prices, 
foreign  trade,  rate  of  exchange?     (From  Davenport.) 

6.  If   large   shipments   of   wheat    are   made   to    England,    will    bills 
of  exchange  on  London  be  higher  or  lower  in  New  York? 

7.  What    effect    on   exchange   has    the   holding    of   American    bonds 
abroad  ? 

CHAPTER  51.     THE  PROTECTIVE  TARIFF 

1.  If  all  trade  is  exchange  do  not  the  members  of  a  trust  reduce 
their  income  when  they  raise  the  price  of  their  products  by  artificial 
agreement  ? 

2.  Is    there    any    likeness    between    trade-unions    and    tariffs?      Be- 
tween tariffs  and  factory  legislation? 


592  QUESTIONS  AND  CRITICAL  NOTES 

3.  Can  it  be  of  advantage  to  trade  freely  with  one  nation  if  gen- 
eral free  trade  is  bad? 

4.  Who  gained  when  Hawaiian  sugar   (before  annexation)   was  ad- 
mitted free  of  duty,  while  other  sugar  was  taxed? 

5.  If  it  would  pay  us  to  admit  goods  free,  may  we  be  justified  in 
taxing  them  to  force  concessions  from  the  other  country? 

6.  What  have  you  read  this  year  about  reciprocity? 

CHAPTER  52.     OTHER   PROTECTIVE   SOCIAL  AND  LABOR  LEGISLATION 

1.  Is  granting  patents  an  interference  with  trade  similar  to  tariffs? 

2.  What  reasons  are  given  in  justification  of  laws  closing  barber- 
shops on  Sundays? 

3.  Can  a  person  owning  a  lot  on  a  residence  street  of  a  city  erect 
a  glue-factory  on  it? 

4.  What  have  you  noted  as  to  the  benefits  or  hardships  of  restrict- 
ing child  labor  in  factories? 

5.  Are  men  less  able  to  bargain  for  the  loan   of  money  than  fol 
other  things? 

6.  Can  law  fix  the  rate   of  interest  at  any  point   desired?     If  so, 
then  ,why  not   at  zero;    if   not,   then  why   fix   any  maximum   rate   of 
interest? 

7.  Are  interest  rates  changing  in  America? 

8.  In  what  ways  is  the  rate  of  interest  affected  by  the  rise  or  fall 
of  the  value  of  money? 

CHAPTER  53.     PUBLIC  OWNERSHIP  OP  INDUSTRY 

1.  What   are   municipal   franchises?     Where   are   they? 

2.  What  kinds  of  municipal  industries  have  you  seen  in  operation? 
How  successful  were  they? 

3.  What  are  the  main  arguments  for  and  against  the  city  owner- 
ship and  control  of  gas  and  waterworks? 

4.  What  troubles  arise  from  city  politics? 

5.  Name   the   industries   that    are    owned    and    controlled   by   towns 
and  cities  of  which  you  have  a  personal  knowledge. 

6.  Which  of  them  are  most  satisfactory  in  your  judgment?     Which 
the  least  so? 

7.  What  is  the  public  sentiment  in  your  home  community  as  to  the 
ownership  of  industries  by  the  town  or  city? 

8.  What   forms   of  state  activity  favor  survival   of  unfit   men   and 
bad  traits  of  character?     What  forms  help  the  fittest  to  survive? 

NOTE.— For  exhaustive  and  well-arranged  references  on  all  aspects 
of    municipal    control    and    municipal    ownership    see    E.    C.    Brooks, 


QUESTIONS  AND  CRITICAL  NOTES  593 

Bibliography  of  Municipal  Problems,  pp.   157-169,  in  Municipal  Af- 
fairs, Vol.  V,  No.  1  (March,  1901). 

CHAPTER  54.     EAILROADS  AND  INDUSTRY 

1.  Why  is  transportation  a  greater  problem  in  the  United  States 
than  in  Europe? 

2.  Show  in  what   way  natural  waterways  have   determined  the  lo- 
cation of  leading  cities  in  America. 

3.  Give  examples  of  cities  whose  growth  has  been  caused  by  rail- 
roads. 

4.  What  interests  favor  and  what  oppose  the  building  of  an  isth- 
mian canal? 

5.  Mention  in  order  of  economic  importance  four  things  that  would 
happen  if  all  American  railroads  were  suddenly  to  be  destroyed. 

6.  What  cases  have  you  seen  where  the  railways  impose  unjustly  on 
the  public? 

7.  Give  instances  you  have  seen  or  heard   of  where  two   shippers 
paid  different  rates  for  the  same  service. 

8.  Why   should    preachers    get   half -fare   rates? 

9.  If  your  neighbor  rides  on  a  pass  and  you  pay  your  fare,  are 
you  helping  to  pay  for  his  ride? 

10.  Do  you  know  any  large  cities  that  are  more  favorable  shipping- 
points  than  neighboring  towns?     Give  reasons. 

CHAPTER  55.     THE  PUBLIC  NATURE  OF  KAILROADS 

1.  What   legal  rights   do   the   builders   of   a   railroad   have   that   are 
not  enjoyed  by  all  citizens? 

2.  Can   you    see    any    clear    distinction    between    the    public    nature 
of  a  railroad  and  of  a  horse  and  carriage? 

3.  What  harm  can  there  be  in  the  acceptance  of  passes  by  judges, 
legislators,  and  other  public  officials? 

4.  Ought  the  law  prohibit  the  sale  of  tickets  by  ' '  scalpers  ' '  ? 

5.  Who  has  the  greater  political  power,  the  president  of  the  Penn- 
sylvania Eailroad,  or  the  governor  of  that  state? 

CHAPTER  56.     PUBLIC  POLICY  AS  TO  CONTROL  OF   INDUSTRY 

1.  What    effect    would    it    have    if   the   state    should    make    laborers 
work  for  unsuccessful  employers  at  lower  wages  than  for  successful 
ones? 

2.  Or  should  reduce  rents  for  the  less  capable  merchants  and  manu- 
facturers ? 


594  QUESTIONS  AND  CRITICAL  NOTES 

3.  Is  there   any   rule   for   determining   the   limits   of  state   interfer- 
ence? 

4.  Why  does  the  question  of  the  control  of  the  railways  in  the  in- 
terest of  the  public  present  especial  difficulties  in  America? 

CHAPTER  57.     FUTURE   TREND  OF   VALUES 

1.  Make    a   list    of   the   things    discussed    in    this    course    that   tend 
toward  improving  the  average  condition  of  men. 

2.  Make  a  list  of  those  that  tend  toward  worse  conditions  for  the 
mass  of  men. 

3.  State   what  kinds   of   material   agents   will   probably   increase   in 
value  relative  to  other  kinds,  giving  reasons. 

4.  State  what  to  your  mind  are  three  important  economic  problems 
whose  answer  is  most  uncertain,  giving  reasons. 

5.  If  you  had  the  power,  what  single  public  measure  that  you  believe 
would    be    practicable    and    effective    would    you    pu.t    on    the    statute 
books,    in    order    to    make    a    juster    division    of    the    social    income? 
Give  reasons. 

NOTE. — On  the  subject  of  this  chapter,  see  Devine,  Economics,  ch. 
xvn  (disposition  of  the  social  surplus)  ;  Jenks,  The  Trust  Problem, 
pp.  190-211;  Marshall,  Bk.  VI,  chs.  xi  and  xn. 


INDEX 


INDEX 


Ability,   variety,   177-83;    physical  America— continued 

differences,      178;      intelligence,  competition,  263;  fortunes,  271; 

179;  training,  180;  moral   quali-  profit-sharing,     293;     producers' 

+;Qa   i»n.  ina/m-iaiittr   i fti  •  fi^arpi-  cooperation,  296;  consumers'  co- 


ties,  180;  inequality,  181;  scarci 
ty,  182;  and  occupation,  203; 
grades,  212;  types,  264;  selec- 
tion, 270-2;  sterilization,  561-2 

Abstinence,  definition,  kinds,  163; 
see  Saving 

Acquisition  vs.  social  production, 
259 

Affection  in  personal  distribution, 
402 

Agricultural  classes,  opposition  to 
commercial,  113 

Agricultural  stage,  261 

Agriculture,  machinery  in,  238 

Alternative  uses,  relation  to  costs, 
277 

America,  farms  let  on  shares,  59; 
land  changes  hands,  60;  exhaus- 
tion of  the  lands,  82;  use  of  in- 


operation,  300;  industrial  stage, 
313;  crises,  352;  gifts  by  wealthy 
men,  368;  law  of  inheritance, 
373;  fortunes,  375;  dress  of 
workers,  397 ;  colonial  policy  to- 
ward, 425, 426;  custom,  426;  gold 
standard,  432;  silver  supplies 
from,  441;  gold  supplies,  442; 
paper  money,  448-9 ;  effect  of  sil- 
ver supplies  from,  454,  457;  ef- 
fect of  gold  output,  457;  banks, 
468-70;  discussion  of  taxation, 
479 ;  prices  in  California,  483 ;  in 
different  sections,  484;  protec- 
tive tariff,  491-503;  growth  of 
manufactures,  497;  factory  laws, 
509-12 ;  state  enterprise,  514-17 ; 
early  settlement  on  the  coast, 
526;  trade  in  War  of  1812,  526; 
canals,  528;  railroad  building, 
529;  aid  to  railroads,  535 


terchangeable  parts,  85;  destruc- 
tion of  forests,  87 ;  coal  deposits, 
88-9;  improvement  of  horses, 

91;   watch-factory,  92;   price  of  American    Federation    of    Labor, 

horses  in  Boer  War,  95 ;  discovery  245 ;   claims  of,  254 

of  mines,  102;  varied  industrial  American  Eevolution,  economic  is- 

conditions,    108;    use   of   money,  sues  in,  8 

109 ;   expression  of  wealth,  114 ;  Animal  economy,  provision  for 

land  became  part  of  world 's  sup-  wants,  40 

ply,  155 ;  standard  of  living,  192 ;  Animals,   problem   of  numbers, 

size  of  families,  193;  food  sup-  185-6 

ply,  194;  increase  of  population,  Antisocial  profits,  289;  of  monop- 

194;    army  rations,  196;    stand-  oly,  311;  from  speculation,  377; 

ard    of    food,    196;    caste,    199;  antisocial  use  of  ability,  378 

democracy    and    efficiency,    200;  Appropriation  stage,  261 

wage     system     dominant,     227;  Ashley,  W.  J.,  575 

wages,    232;    changing    occupa-  Assignats,  448 

tions,    234;    favorable   effect    of  Attribution  of  product,  176 

machinery,    242 ;     difference    of  Austrian  economists,   570 

race  among  workers,  247 ;  indus-  Authoritative   distribution,   406-8 ; 

trial   superiority,    262;    Oriental  use   of,   410-11 
39                                                  597 


598  INDEX 

Balance  of  trade,  international,  Capitalization— continued 

486-7;  so-called  favorable,  493  ample    of,    118;    of    land    rents, 

Bank-notes,  and  paper  money  com-  124;   of  uniform  or  varying  se- 

pared,    447;    typical,    465-8;    in  ries  of  rents,   125-6;   increasing 

United  States,  469  role,  127 ;  of  any  continuing  in- 

Banks,  and  credit,  462-70  functions,  come,  128;  of  franchises,  129;  of 

462-5 ;  in  United  States,  468-70  corporate     incomes,     130';     rate, 

Barter,  definition,  31 ;  under  simple  147 ;  and  interest,  168 ;  influenced 

conditions,    32-5 ;    difficulty    of,  by  taxation,  475 

99;  decline,  108-14;  economy  in  Capitalization     theory     of     crises, 

Middle  Ages,  110  353-4 

Bequest,  limitation  of  right,  368  Carlyle,  T.,  on  wage,   229 
Bets,  see  Gambling  Carnegie,   Andrew,   268,    270,   372, 
Bimetallism,  international,  457-9;  377;  economics  of  gifts  to  libra- 
national,  459-61  ries,  387,  390 
Biologic   doctrine    of   population,  Carver,  T.  N.,  578 

186,  187  Cassel,    578 

Biology,   shows  inequality   of   tal-  Caste,  and  efficiency,  199 

ents,  181  Chance,  unavoidable,  333;  average 

Birth-rate,    of    animals,    187;    de-  in  industry,  334;  artificial,  334; 

creasing  American,  193,  561  legitimate  and  illegitimate,  335 

Bb'hm-Bawerk,    E.    von,    570,    571,  Character,  affected  by  expenditure, 

572,  577,  580,  583  398;    highest    point    of    produc- 

Boycott,  251  tion,  400;  unity  of  choice  deter- 

Brooks,  E.  C.,  593  mining,  401 

Building  laws,  505  Charitable   distribution,   405-6 

Bullock,  C.  J.,  568  Charity,  public,  507 

Buyers,  bidding,  34;  margin  of  ad-  Cheating  and  gambling,  335 

vantage,  35  Child-labor  legislation,  5Q9 

Choice,  of  goods,  harmony  in,  400 

Canadian  bank-notes,  468,  470  Cities,  wealth  of,   contrasted  with 

Canals,  as  carriers,  528-9  feudal  estates,  111,  113 ;  growth, 

Cannan,  Edwin,  571,  573  504;  large,  on  waterways,  528 

Capital,  origin  of  term,  112;   con-  City  ownership,  514-5;  see  Public 

cept  in  modern  business,  114-7.;  ownership 

definition,     115 ;     not     identical  Clark,  J.  B.,  398 ;  theory  of  profits 

with  money,  115 ;  purpose  of  bor-  and  wages,  418,  573,  575,  584 

rowing,   116;   sum,   expressed  in  Clews,  Henry,  on  Wall  Street 

years'  purchase,  121;  sum  of  ex-  finance,  378 

pected    rents,     122 ;     value    not  Climate,  and  income.  48 

primary,  123;   stock,  127;  value  Closed  shop,  249-50 

of   stocks   fluctuate,    134;    time-  Clothing  and  efficiency,  196;  effect 

value    and,    142;    fixed    and    in-  of  choice  of,  396 

creasable   forms,   152-3;   use  by  Coal,  use  and  exhaustion,  88,  558; 

enterprisers,     285;     insured    by  strike  of  1902,  251,  252 

enterprisers,     286;     in    coopera-  Coinage,    433-6;     definition,    433; 

tion,    295;    large,    312;    amount  free  or  gratuitous,  434-6;  token, 

in  factories,  315 ;  value  affected  443-7 ;  free  and  gratuitous,  443 

by  protection,  501  Coins,  light-weight,  443-7 

Capitalistic,  age,  114,  117;  monop-  Collective  bargaining,  248 

oly,   306  Collective  enjoyment,  as  a  mode  of 

Capitalization,  of  all  forms  of  rent,  distribution,  408 

118-30;    rent-charges   as   an  ex-  Collectivism,   552 


INDEX 


599 


Combination     and     wages,    253-6; 
of    the    factors,    260;     opposes 
competition,  429;  of  capital,  see 
Trusts 
Comforts,  relative  meaning,  11; 

and  luxury,  388 
Commercial  monopoly,  306 
Commercial  paper,  discounting  of, 

132 

Commissions,  to  control  railroads; 
541-3;  to  control  corporations, 
545 

Commodity-money  theory,  450 
Common  denominator  of  values,  see 

Money 

Commons,  J.  E.,  573 
Communism,  among  Germanic 

"tribes,  questioned,  365 
Comparative  costs,  doctrine  of, 

482-3 

Competition,    definition,    33;    one- 
sided, 33;  present  limitations  on, 
228;  the  worker  in,  229;  reduced 
by  trade-unions,   248-50;    costly 
in  mercantile  business,  298 ;  free, 
not   equality   of   efficiency,    303; 
alleged  cause  of  trusts,  322 ;  per- 
sistence  of,   331;    and  state   ac- 
tion, 422-30 ;  and  custom,  422-5 ; 
economic"  harmony  through,  42Jjr- 
8;    social    limiting    of,    428-30; 
modern  restrictions,  504 
Competitive  distribution,  409-10  ' 
Competitive  price,  forces  govern- 
ing, 308 

Complementary  agents,  and  value, 
78;   intensive  use  of,   78;   labor 
and  wealth,  175 
Compulsory  distribution,  404 
Conquest  theory  of  property,  363 
Consolidation  of  railroads,  539-40 
Consumers,  determining  costs,  280; 

gain  from  trusts,  325 
Consumers ',  choice  influences  value, 
392;     choice     influences     wages, 
394;        cooperation,        298-301; 
League,  394 

Consumption,  reaction  upon  pro- 
duction, 392-401;  definition  of 
economic,  392;  reaction  upon 
material  agents,  392-5;  reaction 
upon  efficiency  of  workers,  395- 
410;  effects  on  consumer,  398; 


Consumption — con  tinned 

as  a  conventional  division  of 
political  economy,  419 

Consumption,  tax  on,  475 

Consumption  goods,  definition,  20; 

immediately    en  j  oy  a-btej — 21^ a 

part  of  income,  41;  differen- 
tial advantages,  73-5;  diagram, 
grades  by  quality,  75;  proposed 
uses,  161;  saved,  166;  see 
Goods 

Continental  notes,  448 

Contracting  out,  forbidden,  512 

Contract  interest,  see  Interest 

Contract  rent,  see  Eent 

Contract  wages,  see  Wages 

Cooperation,  producers ',  295-7 ; 
consumers',  298-301 

Corporation,  securities,  127-8 ; 
public-service,  129;  increase  of, 
133 

Cost,  involved  in  improvements, 
90;  of  operation,  168;  in  larger 
production,  319;  of  govern- 
ment, 474;  see  Comparative 
costs 

Cost  of  production,  273-81;  from 
the  enterpriser's  point  of  view, 
273-6;  psychic,  273;  alternative, 
274;  money,  274;  and  price 
276;  from  the  economist's 
standpoint,  276-81,  422 

Courts  and  industrial  legislation, 
543,  550-1 

Credit,  sales  involve  interest,  134; 
and  banking,  462-70 

Crises  and  industrial  depressions, 
345-55;  caused  by  sudden  tariff 
changes,  502-3 

Crusoe  economy,  subjective  valua- 
tions, 30;  time-value,  131,  140; 
saving,  166;  economic  wages, 
208;  present  and  future  goods, 
219-20;  need  of  judgment,  265 

Cultivation,  margin  of,   64;   see 
Utilization 

Custom,  and  rents,  56;  and  effi- 
ciency, 199,  200;  affecting  dis- 
tribution, 409;  and  competition, 
422-5,  429 

Daniels,  Winthrop  M.,  571 
Davenport,  Herbert  J.,  567 


600 


INDEX 


Death-rate,  decreasing,  192 

Debts,  public,  as  investments,  133 

Deferred  payments,  standard  of, 
453-61;  definition,  453;  ideals 
for  a  standard,  455-7 

Demand,  definition,  27;  social  as- 
pect of  choice,  28;  law  of,  28; 
curve,  29;  elasticity,  29;  recip- 
rocal, becomes  exchange,  30; 
curve,  diagram,  35 

Democracy,  and  efficiency,  199;  ef- 
fect on  race  progress,  561,  563. 

Deposit  and  discount,  462 

Depreciation   and   rent,   85-7 

Desire,  see  Wants 

Destruction,  and  rent,  of  wealth, 
87-9;  accidental,  of  wealth, 
381-2;  intentional,  382-3 

Devine,  Edward  T.,  587,  594 

Dewey,  Davis  E.,  568 

Differential  advantages,  in  con- 
sumption goods,  73-5;  in  indi- 
rect goods,  75-80 

Diminishing  returns,  law,  61-72; 
definition,  61;  of  all  agents,  62; 
technical,  62;  economic,  63; 
other  meanings  of  term,  66-9; 
general  application  to  space 
relations,  67-8;  confused  with 
large  production,  68;  technical, 
68;  historical,  68;  development 
of  the  concept,  69-72;  applies 
to  all  wealth,  70;  and  popula- 
tion, 184;  and  productivity  of 
labor,  215;  the  broadest  prin- 
ciple of  value,  420 

Diminishing  utility,  law,  22;  dia- 
gram, 24;  relation  to  diminish- 
ing returns,  71 

Directors,  of  railroads,  obligations 
of,  539 

Discount,  commercial,  132,  135 

Discovery  enlarges  natural  re- 
sources, 156 

Discrimination  in  rates,  by  monop- 
oly, 310;  in  railroad  rates,  530-3 

Distribution,  personal  and  func- 
tional 359;  impersonal,  360; 
personal,  nature  of,  402-3; 
definition,  402;  of  the  social  in- 
come, 402-11;  methods  of,  404- 
11;  as  a  conventional  division" 
of  political  economy,  419 


Dividends,  manipulation  of,  130 
Division  of  labor,  201-4;  defini- 
tion, 201;  kinds,  201;  advan- 
tages, 202;  calls  for  directive 
ability,  264;  growth  of  territo- 
rial, 480-2 

Dollar,  meaning  of,  435 
Drink,  effect  of,  396 
Durable  agents,  see  Goods 
Durableness   of  rented   agents,   55 

Economic  goods,  definition  of,  19; 

see  Goods- 
Economic   harmony,   through   com- 
petition, 425-8;   definition,  427 
Economic  law,  nature  of,  206 
Economic  monopoly,  306 
Economic  motives,  see  Wants 
Economic  production,  258;   see 

Production 

Economic  rent,  see  Eent 
Economic  wages,  see  Wages 
Economics,     nature     and     purpose 
3-8;     definition,    3,    4;     subject 
matter,    4;    place    among    social 
sciences,  5,  6;"as-*~sirreTrce,  7; 
synonym   for  -political  economy, 
7 ;  'democratic  in  aim,  8 ;  impor- 
tance, 8;   aim  of  study,  412;   a 
part  only  of  social  science,  413; 
central  point  of,  413;  redefined, 
555;    relation   to    practical   life, 
555 
Economy,  involves  choice,  27;   the 

barter,  108;  the  money,  108-14 
Education,  free  public,  507 
Efficiency,  talent,  and  training  as 
factors    in,    180;    resultant    of 
many    qualities,    181;    of    labor, 
195-204;  equality  of,  not  essen- 
tial   to    competition,    423;     see 
Ability 

Ely,  Eichard  T.,  568,  584 
Emery,  Henry  C.,  585 
Employer,     adjusts    labor    to     in- 
terest rate,  220 ;  see  Enterpriser 
Employment,  no  lack  of,  183 
Energy,  sources  of,  and  income,  50 
Engels,  Frederick,  416 
England,  idea  of  rent  in,  59;  long 
leases,    59;    food   supply   during 
Napoleonic    wars,    69;    coal    de- 
posits, 89;  wages,  232;  changes 


INDEX 


601 


England — continued  Factory,  system,  growth -and  effect, 

in     18th     century,     237;     loans,        243-4;   change  in  number,   314; 
240;     abnormal    effect    of    ma-        limits    to    growth,    319;    legisla- 
chinery,    241;    cooperation,    296,        tion,  509-13 
299;  use  of  term  monopoly,  304;    Farmers  and  the  tariff,  498-9 
cotton    crisis,    345;    crises,    348;    Fauna  and  income,  49 
endowments  limited,  368;  grants    Feeling  and  utility,  26 
to     royal     families,     373;     gold    Fiat-money  theory,  450-1 
standard,   432;    prices   in  Napo-    Fisher,  Irving,  571,  575 
Iconic   wars,   442;    bank   restric-    Fixed  charges,  168 
tion  act,  448-9;  balance  of  im-    Flora  and  income,  49 
ports,    493;    discussion    of    pro-    Food,    and    income,    50;    and    effi- 
tection,  496  ciency,  196;  effect  of,  396;  laws 

Enjoyable  goods,  see  Consumption        and  inspection   of  goods,   506 
goods  Foreign  exchanges,  theory  of, 

Enterprise,  income,  and  social  ser-        485-8 

vice,  376-7  Forestry,  need  of,  88 

Enterpriser,   function   of,    265-72;    Forests,  destruction  of,  87-8 
qualities    of,    267-70;    selection    Franchises,  for  public  utilities,  96; 
of,   270-2;   his  task,  273-5;   his        capitalizing    of,    129;     granting 
costs,  275;  medium  for  consum-        monopolies,    522 
ers'   estimates,    280;    profits   of,    Free  competition,  see  Competition 
283;    origin    of   term,    284;    his    Free  coinagei  money  value,  435 
services     reviewed,     285-8;     his    Freedom,  economic,  422-30;  defini- 
risk,*  287;    intermediary    in    in-        tion,  422 

dustry,  287 ;  lacking  in  coopera-    Free  goods,  definition,  19 ;   on  the 
tion,     297;     relation    to     profit-        margin  of  utilization,  75 
sharing    and    cooperation,    300;    Free-silver   movement   in  America, 
as  risk-taker,  338  459-61 

Environment,  betterment,  92,   162     Free  trade,  see   International 

Ethics,  definition,   6;   and  econom-        trade 

ics  of  time-value,   144;    of  con-    Future  rents  capitalized,  125 
sumption,     395,     398,     401;     of 

railroad  problem,   532,  539;   see    Gambling     vs.     insurance,     333-8; 
Morality  definition   of   typical,   334;    eco- 

Europe,  industrial  methods  of,  262        nomic  theory  of  336 

Exchange,  in  a  market,  30-8 ;  and    George,  Henry,  his  theory  of  value, 
demand,  30,  31;  advantage,  31;          417 
isolated,  32 ;   of  present  and  f u-    Gibson,  A.  H.,  577 
ture  goods,  145-9 ;   as  a  conven-    Gilman,  N.  P.,  on  profit-sharing, 
tional  division  of  political  econ-        293 

omy,  419;  foreign  and  domestic,    Glut  theory  of  crises,  351-2 
of    money,    463;     international,    Gold,    fitness    as    money,    102;    as 

money,  432-3;  supply  of,  435; 
discoveries,  442;  as  a  standard, 
455,  457;  increased  output,  461; 
shipping  point,  485 
Goods,  definition,  19 ;  adjustment 
to  wants,  21;  shifting  series, 
27 ;  substitution,  27 ;  series  of, 
39;  relation  of  indirect  to  grat- 
ification, 46;  enjoyable,  47;  du- 


see  International  trade 
Extensive  margin  of  indirect 

goods,  78-9;  see  Utilization 
Extravagance  to  give  employment, 

386 


Factors,  definition,  260;  combina- 
tion of,  260-4;  cost  of,  274; 
proportioning  of,  275;  mutual 
employment  of,  420 


rable,    47;    unripened,    47;    de- 


602 


INDEX 


Goods — con  tinned 

grees  of  durableness,  48;  limited 
number,  52;  free  and  unlimited, 
152 

Government,  a  condition  of  effi- 
cient labor,  198;  as  consump- 
tive good  and  productive  agent, 
473;  paper  money,  see  Paper 
money 

Granger  stores,  300 

Gratification,      defined,      16;      and 
marginal  utility,  22;  temporary, 
39;  at  different  times,  45;  time- 
value  of,  141,  143 
-Greenbacks,  448,  451 

Gresham's  law,  446-7 

Hadley,  A.  T.,  579,  580 
Happiness,    and    wealth,    18;    and 

ostentation,  388;   and  character, 

401 

Hildebrand,  575 
Historical  diminishing  returns,  68; 

confused  with  technical,  70;  see 

Diminishing  returns 
Home-market  argument  for  pro- 
tection, 498-9 
Honesty,  a  condition  of  efficiency, 

198;  of  public  officials,  551 
Household    industry    in    America, 

313 

-"Immigration  and  protection,  498 
Improvements  to  increase  prod- 
ucts, 90 

Incidence  of  taxation,  476 
Income,  as  a  flow  of  goods,  39-42 ; 
national,  social,  individual,  pri- 
vate, objective,  money,  40; 
gross,  net,  41 ;  of  consumption 
goods,  41 ;  present,  future,  41 ; 
funded,  unfunded,  42;  as  a  se- 
ries of  gratifications,  43 ;  psy- 
chic, 43-5;  all  sources  of,  are 
productive,  43;  affected  by  ob- 
jective conditions,  48-52;  af- 
fected by  increasing  capital, 
152;  and  social  service,  370-80; 
from  property,  370-6;  from 
personal  services'  376-80;  jus- 
tice of  large,  38^-91;  istribu- 
tion  of  the  social,  402-11;  and 
taxation,  474-7 ;  affected  by 


Income — continued 

crises,  354-5;  personal  and  im- 
personal shares,  359-62;  per- 
sonal, 361;  complex  sources  of 
psychic,  403 

Increasable  agents,  153-5 ;  scale 
of  increasableness,  158 

Increase,  of  product,  90;  of 
agents,  92,  95;  of  rent-bearer 
affects  others,  93 

Indestructibility  imputed  to  rented 
agents,  55 

Indirect  goods,  see  Goods 

Individualism,  extreme,  its  ideal  of 
competition,  410 

Industrial  depressions,  definition, 
346 

Industrial  revolution  caused  by 
machinery,  237 

Industrial  stage,  261 

Industry,  changes  in,  affecting 
money,  101;  money  reacts  upon, 
102;  diversity  of  condition  in 
America,  108;  changes  in  Eu- 
rope, 109;  growing  complexity 
as  interest  falls,  168 

Infant-industry  argument  for  pro- 
tection, 497 

Inheritance,  effect  on  industry,  12; 
social  effects,  369-73 

Insurance,  origin,  337;  economic 
theory  of,  338;  sound  conditions 
in,  338 

Integration  of  industry,  321 

Intensive  margin,  see  Utilization 

Interest,  opposition  to,  in  Middle 
Ages,  112;  the  modern  contract 
forms  for  borrowing  wealth 
114;  contract  and  rent  contract, 
116;  on  loans  contrasted  with 
rent-charges,  120;  increased  use 
of,  121;  permitted  by  Rome, 
122;  two  modes  of  approach, 
123 ;  ' '  the  prevailing  rate  ' '  and 
capitalization,  124;  on  money 
loans,  131-7;  gross  and  net, 
132 ;  in  credit  sales,  134 ;  con- 
cealed, 135;  evasion  of  legal 
rate,  135;  adjustment  of  busi- 
ness to  the  rate,  140;  rate  of 
contract,  147-8;  in  sacrifice 
sale,  149;  and  time-value,  150; 
relation  to  rent,  150;  first  use 


INDEX 


603 


Interest— continued 

of  term,  151;  rate  divides  pres- 
ent and  future  uses,  159;  and 
future  goods,  diagram,  160; 
equalizer  of  time-values,  162; 
rate  of,  and  saving,  165;  and 
capitalization,  168;  and  im- 
provements, 168;  rate  relates 
present  and  future,  220;  con- 
tract, with  enterpriser,  285;  con- 
ventional conception  of,  413; 
contract,  and  deferred  pay- 
ments, 454 

Intermediate  products  and  costs, 
279 

Internal  revenue,  475 

International  demand,  ratio  of, 
484-5 

International  trade,  general  theory 
of,  480-90;  as  a  case  of  ex- 
change, 480-5;  definition,  480; 
equation  of  international  ex- 
change, definition,  483;  cash 
balance  of,  486;  real  benefits  of, 
488-90 

Interstate  Commerce  Act,  discus- 
sion of,  537,  542;  workings  of, 
543;  importance  of,  545 

Inventions,  affect  rent,  85-6;  to 
increase  rent-bearers,  91;  adds 
to  supply,  156 

Investment,  and  rate  of  interest, 
148;  and  saving,  165;  in  stock 
of  corporation,  342 

Ireland,  tenants '  improvements  in, 
59 

Iron  law  of  wages,  216 

Jenks,  J.  W.,  on  trusts,  327,  584, 

594 
Jevons,  W.  S.,  on  the  coal-supply, 

88 

Johnson,  A.  S.,  572 
Justice    in   taxation,   477 
Just  price,  547 

Keasbey,  L.  M.,  576 
Knights  of  Labor,  245 

Labor,  the  old  distinction  between 
productive  and  unproductive, 
43,  260;  and  classes  of  laborers, 


Labor — con  tinned 

173-83;  definition,  173;  and 
play,  173;  pleasurable,  174; 
and  wealth,  175;  direct  and  in- 
direct services,  176;  grades  of, 
177;  scarcity,  182;  supply  of, 
184-194;  employer's  and  social 
view,  184;  conditions  for  effi- 
cient, 195-204;  objective  physi- 
cal conditions,  195-8;  social 
conditions,  198-201;  division  of, 
201-4;  of  different  grades,  212; 
relation  to  value,  215-25;  pro- 
ductivity of,  215;  distance 
from  gratification,  219;  no  unft 
of,  224;  value  of  product  in- 
sured by  enterpriser,  286; 
economized  in  large  production, 
318;  legislation,  509-13 
Labor  theory  of  property,  364 
Laissez  faire,  ideal  of,  518 
Land,  rented  in  Middle  Ages,  57, 
110;  and  diminishing  returns, 
69,  70;  and  repairs,  81-2;  con- 
tinues to  be  rented,  113;  prod- 
ucts of  increasing  cost,  154; 
relatively  fixed  in  quantity, 
154-5 ;  economic  supply  of,  155- 
6;  produced,  157;  not  monopoly, 
303 

Land  grants,  to  railroads,  535 
Large    industry,   social   effects    of, 
244;    in    United    States,    312-7; 
advantages  of,  318-20;   econom- 
ics of  combination,  321 
Large    production,    confused    with 
diminishing  returns,  68;  sharing 
of  the  economics  of,  325 
Lasalle,  Ferdinand,  416 
Latin  Union,  458 

Law,  definition,  6;  nature  of  eco- 
nomic, 206 ;  in  relation  to  wealth. 
361 

Legislation  and  local  interests,  549 
Liberty  of  wage-worker,  231 
Lloyd,   Henry  D.,   on   cooperation. 

296 

Legal  theory  of  property,  364 
Legal-tender     quality     of     paper 

monev    4-41".. 

Loans/  dhort -time,  132,  137;   long- 
time, 133,  138 
Luck  and  profits,  289 


604 


INDEX 


Lump    of    labor,    error    of    notion, 

240 
Luxury,  relative  meaning,  11;  385- 

91;    definition,   385;    fallacy  of, 

386-7 

Machinery,  need  of  repairs,  83-4; 
and  natural  resources,  91 ;  defi- 
nition, 236;  and  labor,  236-44; 
extent  of  use,  236-8;  age  of, 
237;  effect  on  wages,  239-44; 
evils  of  sudden  introduction, 
239;  economy  in  large  produc- 
tion, 318 

Malthus,  Eobert,  on  fixity  of  land, 
154;  on  population,  579— 

Malthusian  doctrine,  578 

Manual  workers,  social  service  of, 
379 

Manufactures,  fallacious  contrast 
with  agriculture,  67;  do  not  fix 
interest  rate,  124-5;  machinery 
in,  283 

Marx    Karl,  416,  417 

Marginal  contribution  of  labor,  213 

Marginal  labor,  210 

Marginal  pair,  34;  diagram,  35 

Marginal  utility,  definition,  23-7; 
in  barter,  32;  in  use  of  goods, 
64;  of  consumption  goods,  75; 
of  indirect  goods,  78-9;  of 
wages,  211,  213;  fixes  cost  of 
factors,  277;  applied  to  gam- 
bling, 336-7;  in  insurance,  338; 
of  income,  399;  extension  of  the 
principle,  420-1 

Margin  of  advantage,  34;  dia- 
gram, 35 

Markets,  definition,  36;  exchange 
in,  36-8;  widening,  36-7; 
growth,  263 

Market  value,  built  on  subjective 
valuation,  35,  38;  of  time,  145 

Marriage,  postponement,  190 

Marshall,  Alfred,  573,  574,  583,  594 

Material  resources,  relation  to  effi- 
ciency, 195 

Material  wants  as  motives,  9 

Medium  of  exchange,  see  Money 

Merchants  impart  utility,  31 

Middle  Ages,  markets,  36;  custom- 
ary rents,  56;  renting  contract, 
57-9;  limited  use  of  money, 


Middle  Ages— continued 

109-13;  rent-charges,  118-22;  use 
of  term  interest,  151 ;  death-rate, 
192;  caste,  199;  system  of  labor, 
227;  industrial  changes,  237; 
marine  insurance,  337 ;  no  crises, 
348;  favored  classes,  373;  sump- 
tuary laws,  390;  custom,  424; 
competition,  425;  prices,  441; 
depreciation  of  money,  444-5; 
small  political  units  in,  481; 
control  of  industry  in,  553 

Mill,  John  Stuart,  on  fixity  of 
land,  155;  on  cooperation,  296; 

•     361,  368,  398,  417,  572 

Money,  as  a  tool  in  exchange,  98- 
107;  origin,  98-103;  nature  of 
use,  103-5;  value,  105-10;  as 
medium  of  exchange,  99;  quali- 
ties, 100;  materials,  101;  an  in- 
direct agent,  103;  as  common 
denominator,  104;  as  storehouse 
of  saving,  105;  commodities 
with  monetary  use,  106;  gen- 
eral use  of,  107;  defined, 
107,  431-2;  and  the  con- 
cept of  capital,  108-17 ; ;  use 
in  various  countries,  109;  in- 
creasing use  in  medieval  cities, 
111;  not  identical  with  capi- 
tal, 115;  time-value  and,  142; 
form  taken  by  saving,  167; 
movement  of,  before  a  crisis, 
346;  use,  coinage,  and  value, 
431-42;  the  precious  metals  as, 
431-6;  quantity  theory  of,  436- 
42;  standard,  or  primary,  432; 
fundamental  use,  436;  average 
demand  for,  437;  effect  of 
changes  in  supply,  454,  457, 
459 ;  territorial  distribution, 
487-8;  and  foreign  trade,  484 

Money-changing,  463 

Money  market,  for  short-time 
loans,  137;  for  productive  loans, 
139 

Money  theories  of  crises,  352-3 

Monopoly,  of  labor,  253;  profits, 
302-11;  nature  of,  302-5;  defi-- 
nition,  304;  kinds  of,  305-8; 
test  of,  308;  price  fixed  bv 
308-11;  meaning,  312;  and  sup- 
ply, 324;  profits,  social  burden, 


INDEX 


605 


Monopoly— con  tinned 

326;  in  protective  tariff,  500-1; 
in  localized  public  utilities,  519- 
21;     public     gain     from,     522; 
power  of  the  railroad,  530,  533 
Moral  qualities  in  industry,  180 
Morality,  as  motive,  13-14;  of  lux- 
ury,   389;    opposes    competition, 
429 

Mortgages,  nature  of  security,  133 
Motives,  economic,  9-14;  see 
Wants 

Nail  trust,  329 

ISIatural  economy,  110 

Natural  law,  philosophy  of,  426 

Natural  resources,  and  income,  49; 
exhaustion  of,  89,  558;  adapted 
and  improved,  90;  machinery  an 
adaption  of,  91;  development  of, 
560;  see  Land 

Natural-rights  theory  of  property 
364 

National  ownership,  516-7;  see 
Public  ownership 

Necessities,  relative  meaning,  11 

Negro,  simple  wants,  11 ;  caste 
sentiment  regarding,  199;  work- 
ing hours,  201 

Normal  price,  37 

Occupation  and  talent,  203 
Occupation     theory     of     property, 

363 

Oil  trust,  328 
Open  shop,  249-50 
Organization,  of  workers,  need  of, 

246;  required  for  efficiency,  262; 

and    the    enterpriser 's    function, 

265-72 
Orthodox     economists,     415,     416; 

predictions  of,  557 
Over-production    theory    of    crises, 

351 
Ownership,  forms  of,  363 

Paper  money,  bank-notes  as  politi- 
cal, 466;  experiments,  447-9; 
definition,  447;  theories  of,  450-2 

Par  of  exchange,  definition,  485, 
486 

Pastoral  stage,   261 


Patten,  S.  N.,  586 

Permanent  possession,   53;   see 
Capitalization,   Property 

Personal  distribution,  see  Distribu- 
tion 

Physiocratic  school,  415 

Political  corruption  and  industrial 
legislation,  550 

Political   economy,    see   Economics 

Political  money,  see  Paper  money 

Political  monopoly,  305 

Political  security,  and  saving,  163; 

•  a  condition  of  efficiency,  198 

Politics,  definition,  6;  and  the  tar- 
iff, 503 ;  influence  of  railroads 
in,  538 

Population,  growth  in  Europe  in 
18th  century,  69;  doctrine  of, 
184-7;  related  to  resources,  184; 
animal  stage  of  problem,  185; 
human  population,  186;  in  hu- 
man society,  187-90;  excess, 
188;  control,  188;  current  as- 
pect of,  191-4_|_  resultant  of 
many  forces,  191;  growth  not 
fatalistic,  191;  quality,  193, 
561,  562;  increase  in  the  19th 
century,  194 

Present  and  future,  wants,  44; 
rents,  125;  goods,  145;  compet- 
ing for  labor,  220-21 

Price,  definition,  36;  market  and 
normal,  37;  under  competition, 
308;  under  monopoly,  309-310; 
of  trusts  affected  by  competi- 
tion, 331;  a  social  fact,  360; 
changes,  see  Money 

Primitive  society,  war  in,  188; 
custom  in,  424 

Private  property,  and  saving,  164; 
and  monopoly,  306;  and  inheri- 
tance, 359-69;  origin,  362-6; 
limitations,  367-9;  vj&.  socialism, 
376  '" 

Producers   injtrirllftflHttttts,    330 

Producer^ **  cnjjiter^Hl  H^def- 
inition,  2J 

Production,  aWcto 
166-9 ;  agents 
sources  of  economic,  222;  and 
the  combination  of  the  factors, 
257-64;*  nature  of,  257;  eco- 
nomic and  personal,  258;  social, 


606  INDEX 

Production — continued  Protective  tariff,  claimed  to  be  so- 

259;  vs.  welfare,  398;  unity  of  cially  expedient,  374;  491-503; 
process,  418;  as  a  conventional  definition,  491;  nature  and 
division  of  political  economy,  claims  of  protection,  491-6; 
419;  by  transportation,  525  measure  of  justification  in,  496- 

Productive    goods,    definition,    20 ;        501 ;  values  as  affected  by,  501- 
affect  output  of  labor,  195  3;    compared    with    other   social 

Productive    and    unproductive    in-        legislation,  512 

dustries,  260  JL  Psychic    income,    39-45;     complex 

Productive  labor,  see  Labor  sources  of,  403;  see  Income 

Profits,   unearned,   by   some   direc-    Psychology  of  crises,  354 

tors,   130;   on  purchase  of  capi-    Public    control    of    industry,     ex- 

tal,    138;    margin   of,    275;    loss        amples,  544-8;    difficulties,  548- 

of ,  282-91 ;  definition,  282,  291 ;  \     51 

meaning     of     terms,     282-5;     a  ^Public    interests,    limiting    private 

species  of  economic  wages,  284;         property,     367;     paramount     in 

fluctuation    of,    288 ;    statement  1     social    legislation,    505-9 

of     law,     289;      pseudo,     289  ;\  Public  officers,  interested  in  cor- 

chance,    289-90;    conditioned   on\      porations,  343 

skill,   290;   risk  theory  of,   291;]  Public      ownership      of      industry, 

to  promoters  of  trusts,  322;   of  I      514-24;     examples     of,     514-7; 

promoter,  342;   of  trustee,  343;  \      economic  aspects  of,  517-24 

before  and  after  a  crisis,   347;  ^Public  policy  as  to  control  of  in- 

relation  to  wages,  415;   Clark's        dustry,  see  Public  control 

theory,    418;    in    foreign    trade,    Public   utilities,   increase   of   rents 

495  from,  96 

Profit-sharing,   292-5;    definition,       Public  wants,   development  of, 
292  472 

Progress,     of     the     masses,     232;    Publicity  of   corporation   manage- 
cause  of,  232-3;  must  grow  out        ment,  546-7 
of  wage  system,  234;  marked  by 

control  over  nature,  261;  stimu-    Quantity    theory    of    money,    436- 
lated  by  luxury,  388;  and  refine-        42;    definition,    438;    objections 
ment    of    desire,    399;    by    wise        to,  439-41 
method     of     distribution,     411; 

due  to  temporary  conditions,  Kailroad,  need  of  repairs,  83;  and 
558;  social  vs.  racial,  560;  de-  industry,  525-33;  as  a  carrier, 
pends  on  race  quality,  561;  527-30;  economic  vs.  technical 
depends  on  competition,  562,  efficiency,  527;  public  nature  of, 
endangered  by  status  and  envy,  534-43;  privileges  of,  534-8;  ob- 
563  ligations  of,  536-8 ;  political  and 

Promoter,  services  of,  342;  profits,        economic     power     of,     538-40; 
342-3  commissions  to  control,  541-3 

Property,  private,  effect  on  indus-    Eailroad   rates,    discrimination   in, 
try,    12,    effect    on    population,        530-3;    similarity  to  taxes,   538 
189;    190;    and    wealth,    361-2;    Rank  of  goods,  technical,  46 
definition,    362;    and    social    ex-    Eapp,  George,  266 
pediency,  370;  in  land,  374;  de-    Real  wages,  definition,  207;  raised 
fense    of,     374-5;     see    Private        by  machinery,   242        , 
property  Recreation,  influence  on  efficiency, 

Property  tax,  475  397 

Protective  social  and  labor  legis-    Religion,  as  economic  motive,   13- 
lation,  504-13  14;    opposes  competition,   429 


INDEX  607 

Kemuneration,   profit-sharing  as   a  Roosevelt,   Theodore,   efforts  to 

method,    295;    methods    of,    see  control  corporations,  546 

Wages  Kossignol,  J.  E.  le,  584 

Kent,  the  renting  contract,  53-60;  Roundabout  process,  46,  576 
origin     of     term,     53;     several 

meanings,  54 ;  essence,  55 ;  as  usu-  Sage,    Russell,    on    great    corpora- 

fruct,    55;    imputed   durableness  tions,  377 

of  rented  agents,  55;  gross  and  Satisfaction,  see  Gratification 

net,  55;   economic  and  contract,  Saturation  point  for  coinage,  443 

56-7;    history    of    contract,    56-  Saving,  and  rate  of  interest,  159- 

60;    rent    charge,    58;    economic  63;      conditions     favorable     to, 

rent    wider    than    renting    con-  163-6;   influence  on  methods  of 

tract,  60;   connection  with  grat-  production,  166-9;  benefits,  169; 

ification,    73;    varies   with   qual-  future   effect   of,    560 

ity,  75;  with  quantity,  diagram,  Scarcity,    basis    of    economy,    19; 

77;  limits  of,  79;  economic  and  effect  on  utility,  73;  of  various 

contract,   79-80;    of  wealth,   af-  goods,    76;     of    present    goods, 

fected    by    repair,    depreciation,  146;  of  common  materials,  153; 

and    destruction,    81-9;    changes  of  all  economic  goods,   153;    of 

in,   90-7;    of  money,   106;    basis  human    services,    182;    of   labor, 

of     capitalization,     122-4;     dis-  207,   225;   not  synonymous  with 

counted,    123;    relation   to   time-  monopoly,  302 

discount,     150-1 ;     and     wages,  Seager,  H.  R.,  568 

mutually     influence,     175;     "of  Seigniorage,  definition,  434;  and 

ability,"  178;   and  wages,  205;  value,  443-7 

' '  of    labor, "    205 ;    relation    to  Self-interest,  social  effects  of,  427 

wages,   215-8,    221;    as  personal  Sellers'  margin  of  advantage,  35 

or      impersonal      income,      359;  Serfdom,  conditions,  227;  see 

conventional  conception  of,  413 ;  Middle  Ages 

as    usufruct,     414;     in    Middle  Services,    a    condition    of    income, 

Ages,  424  207;    and   wages,   210,   213;    so- 

Rent-bearers  and  rents,  90-7  cial  and  individual  estimates  of, 

Rent-charges,    58;    sale    and    pur-  379;   see  Labor 

chase,  118-22  Shifting  of  taxes,  476 

Renting    contract,    53-60;     defini-  Silver,   fitness   as   money,    102;    as 

tion,    57;    in   the    Middle   Ages,  money,    432-3;    as    a    standard, 

57;  narrow  use,  58,  59,  60;  and  455 

economic  rent,  60;  hindered  im-  Single-tax,    purpose,    374;    theory 

provements,       110;       contrasted  of  value,  417 

with  interest  contract,  116  Skill,      condition      of      continuing 

Repairs,  and  rent,   81-84;    do  not  profits,  290;   of  labor,  see  Abil- 

prevent    decay,    85;    and    time-  ity 

value,   143  Slavery,  as  a  system  of  labor,  227 

Replenishing  agents,   154  Smart,  570,  571,  583 

Rhodes,  Cecil,  372  Smith,  Adam,  on  money,  103;  181, 

Ricardo,  David,  on  fixity  of  land,  182;  his  "Wealth  of  Nations/" 

,155_;  labor  theory  of  value,  224;  425-6;  484,  557 

398,  417,  442,  574  Social  amelioration,  various  kinds, 

Ripley,  W.  Z.,  575  504-9 

Risk  by  enterpriser,  287  Social  changes,  and  rents,  94;  tern- 
Risk  theory  of  profits,  291  porary,  95 

Risk-taking,    legitimate    and    ille-  Social  classes,  volitional  control  in, 

gitimate,  335  190 


608 


INDEX 


Social  control,  progress  of,  551-4; 
see  Public  control 

Social  effects  of  a  tariff,  498 

Social-expediency  theory  of  prop- 
erty, 365-6;  basis  of  private 
property,  370;  of  inheritance, 
370-3;  of  class  legislation,  373; 
of  protective  tariffs,  374;  of  re- 
warding talent,  378;  in  taxa- 
tion, 478 

Social  institutions  and  personal 
incomes,  360 

Social  legislation,  growing  need, 
197,  504 

Social  sciences,  nature,  5;  com- 
plexity, 5,  6 

Socialism,  extreme,  its  ideal  of 
distribution,  410;  radical,  vs. 
social  reform,  552 

Socialistic  theory  of  value,  416 

Socialists,  predictions  of,  553 

Social  prophecy,  553 

Social  regulation  of  bank-notes, 
467,  470 

Social    service    and    income,    370- 

80 

*  Specialization,  and  size  of  market, 
263;  of  risk-taking,  339-40 

Speculation,  in  goods,  336;  as 
risk-taking,  338-42;  in  all  busi- 
ness, 339;  as  insurance,  340;  by 
lambs,  341;  legitimate  and  ille- 
gitimate, 344;  income  from, 
376-7 

Spencer,  Herbert,  518 

Spiritual  needs  as  economic  mo- 
tives, 13-4 

Stages  of  industry,  313 

Standard  of  deferred  payments, 
see  Deferred  payments 

Standard  of  living,  definition,  191 ; 
Asiatic,  191;  American,  192; 
theory  of  wages,  216;  result  of 
sudden  change  in,  387-8 ;  change 
in  19th  century,  557 

State,  function  to  direct  competi- 
tion, 429-30;  function  of  the, 
471-3;  regulates  railroads,  541- 
2;  regulates  corporate  industry, 
544-8 ;  increasing  functions, 
548 

State  ownership,  515-6;  see  Pub- 
lic ownership 


State  socialism,  growth  of,  551-2 
Status,  as  method  of  distribution, 

409 

Storehouse  of  saving,  see  Money 
Strength  of  men  and  women,  179 
Strikes,    251;    violence,    252;    cost, 

252 

Subsidiary  coinage,  445-6 
Subsistence   theory   of   wages,   217 
Sugar  trust,  328 
Sumner,   W.   G.,   567 
Supply,   relation  to   utility,    24-6; 
curve,   diagram,   35;    of  land  in 
economic  sense,   155;    limitation 
of   better  qualities,   158;    of  la- 
bor,   184;    and    monopoly,    324; 
and  trust  prices,  331 
Sympathy,    as   an   economic   force, 
13,  235 

Talent  and  occupation,  203;  see 
Ability 

Tariff  for  revenue,  491;  see  Pro- 
tective tariff 

Taussig,  F.  W.,  580 

Taxation,  in  its  relation  to  value, 
471-9;  definition,  471;  purposes 
of,  471-4;  forms  of,  474-7; 
principles  and  practice,  477-9 

Taxes,  as  a  mode  of  distribution, 
407 

Technical  diminishing  returns,  68; 
confused  with  historical,  70;  re- 
fers to  limited  time,  71 

Technical  rank  of  goods,  46 

Temperance  legislation,  507 

Temporary  use,  53 ;  see  Rent 

Tenement-house  laws,  505 

Time,  in  relation  to  wants,  44;  re- 
lation to  gratification,  161 

Time-discount,  of  future  rents, 
125-6;  rate  fixed  in  practice, 
126 

Time  relations  of  goods  to  wants, 
46 

Time-value,  and  interest,  131; 
theory  of,  141-51 ;  definition 
and  scope,  141-5;  fixing  of  rate, 
145-51;  and  rate  of  interest, 
149-50;  relation  to  wages,  219,- 
22 ;  the  highest  problem  of 
value,  414 

Tin-plate  trust,  329 


INDEX 


609 


Token  coins,  445-6 

Trade-unions,  245-56;  objects,  245- 
8;  methods,  248-53;  claims  of, 
254;  effects,  on  wages,  253-6; 
and  profit-sharing,  294;  monop- 
oly of  labor,  308 

Transportation,  as  a  form  of  pro- 
duction, 525;  changes  in  19th 
century,  529-30 

Trant,  book  on  trade-unions,  254-5 

Trustee,  speculating,  343 

Trusts,  in  United  States,  growth 
of,  312-22;  recent  organization 
of,  315-7;  economic  possibilities 
of  consolidation,  321;  causes  of, 
320-2;  in  legal  and  popular 
sense,  320;  effect  on  prices,  323- 
32;  control  of,  332 

Under-consumption   theory   of 
crises,  351 

Unearned  increments,  various 
kinds,  96 

Unions,  see  Trade-unions 

United  States,  see  America 

Unproductive  labor,  see  Labor 

Unripe  goods,  see  Goods 

Usufruct,  see  Bent 

Usury,  in  Middle  Ages,  113;  usury 
laws,  508 

Utility,  broad  sense,  19;  see  Mar- 
ginal utility 

Utilization,   intensive   margin,    64; 
extensive,      65;      diagram,      65; 
equilibrium  of  two  margins,  66; 
•  of  indirect  goods,  78-9 

Value,  definition,  20;  relation  of 
labor  to,  222-5;  characteristics 
of,  258;  cost  of  production  ex- 
planation, 277;  genealogy  of, 
(diagram)  278-80;  law  of,  and 
monopoly  price,  311;  law  of, 
and  trusts,  323;  survey  of  the 
theory,  412;  the  unit  of,  413; 
stages  of  value,  414;  various 
aspects,  419;  generality  of  the 
law,  420;  effect  of  taxation  on, 
475-7;  future  trend  of,  555-63 

Value  theories,  relation  to  social 
reforms,  415-8 

Volitional  control,  of  population, 
188,  189,  191,  193,  561 


Wage  contract,  terms  of,  229 

Wage-fund  theory  of  wages,  217 

Wages,  related  to  scarcity,  182; 
and  efficiency,  196;  law  of,  205- 
14;  nature  of,  205-8;  and  rent, 
205;  economic  and  contract, 
206,*  real  and  nominal,  207; 
modes  of  earning,  208-11; 
methods  of  remuneration,  211; 
and  the  general  law  of  value, 
211-4;  term  "  general  rate," 
211;  differences  in,  212;  state- 
ment of  law,  213;  and  rent, 
215-8;  and  time-value,  219-22; 
law  of  wages,  215;  iron  law, 
216;  and  ambition,  230;  rise  of 
money  form  of,  232;  real, 
changes  in,  232;  more  better- 
paid  callings,  233;  raised  by 
machinery,  242;  in  general  in- 
dustry determined  by  impersonal 
economic  forces,  255;  and  prof- 
its, 284;  and  profit-sharing, 
295;  as  personal  or  impersonal 
income,  359;  influenced  by  con- 
sumers' choice,  394;  relation  to 
profits,  415;  and  protective  tar- 
iff, 495;  laws  regulating  pay- 
ment, 511 

Wages  system,  and  its  result,  226- 
35;  defined,  226;  development, 
227;  as  it  is,  229-31;  progress 
under,  232-5 ;  gloomy  view  of,  233 

Walker,  Francis  A.,  theory  of 
wages,  417 ;  578 

Wants,  material,  9-12;  non-mate- 
rial, 13-4;  of  animals,  9;  primi- 
tive, 10;  civilized,  10;  and  prog- 
ress, 11 ;  growth,  12 ;  refine- 
ment, 12;  complex,  14;  depen- 
dence on  things,  15 ;  relation  to 
goods,  16;  kinds,  21;  changing, 
26;  recurrence,  39;  in  series,  39; 
present  and  future,  44;  see  Con- 
sumption 

War,  to  remedy  over-population, 
188  ;  affects  productive  agents,  394 

Waste,  and  luxury,  381-91;  of 
wealth,  381-5;  individual,  384; 
in  public  outlay,  384-5;  fallacy 
of,  385 

Water  routes,  influence  on  local  ad- 
vantages, 526-7 ;  economy  of,  528 


610 


INDEX 


Wealth,  and  welfare,  15-20;  defi- 
nition, 17,  18;  and  income,  41; 
related  to  gratification,  44;  and 
its  indirect  uses,  46-52;  con- 
ditions of  economic,  48-52;  in 
city  and  country,  contrasted, 
111;  loan  of,  in  Middle  Ages, 
112;  concept,  and  capital  con- 
cept, 116;  and  property,  362; 
inequality  of,  375 

Welfare,  and  wealth,  15-20;  and 
instinctive  choice,  395;  vs.  pro- 
duction, 398 

•if 


Wieser,  570,  571,  580,  583 

Wind  and  water  as  sources  of 
power,  51 

Woman's  work,  510 

Work,  see  Labor 

Workers,  effect  of  machinery  on, 
239-44;  need  of  organization, 
246;  need  of  direction,  265-7; 
and  profit-sharing,  294;  gains 
from  trusts,  325;  health  in  fac- 
tories, 509-10 


Years'  purchase,  120 


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